<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED
BY RULE 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
INTERSTATE GENERAL COMPANY L.P.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
[X] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
<PAGE>
INTERSTATE GENERAL COMPANY L.P.
222 SMALLWOOD VILLAGE CENTER
ST. CHARLES, MARYLAND 20602
Dear IGC Unitholder:
As we announced in December 1996, we propose to transfer the principal real
estate operations of Interstate General Company L.P. ("IGC") to American
Community Properties Trust ("ACPT") and to distribute to the partners of IGC,
including IGC Unitholders, all of the common shares of ACPT (the
"Restructuring"). Accordingly, following the Restructuring, IGC Unitholders
will own both IGC Units and ACPT Common Shares.
The purpose of the Restructuring is to create an attractive investment
vehicle for the principal real estate assets and operations of IGC that will
not be burdened with the operating losses of American Family Homes, LLC
("AFH") and the capital needs of Interstate Waste Technologies, Inc. ("IWT"),
and Caribe Waste Technologies, Inc. ("CWT") or with the wetlands litigation.
In addition, ACPT, as a type of business trust whose principal income is
dividends from corporations, should be a more attractive investment for
pension funds and mutual funds than is IGC as a master limited partnership. We
expect that ACPT will have greater access to capital markets than IGC has had.
ACPT will act as a self-managed holding company and will own all of the
outstanding equity interests in American Rental Management Company ("American
Management"), American Land Development US, Inc. ("American Land"), and IGP
Group Corp. ("IGP Group") and all of the outstanding common stock of American
Rental Properties Trust ("American Rental"). In the Restructuring, American
Rental, through its subsidiary partnership American Housing Properties L.P.
("American Housing"), will acquire IGC's partnership interests in United
States investment apartment properties and its land in the United States
presently intended for development as apartment properties. American Rental, a
Maryland real estate investment trust, is expected to be taxed as a real
estate investment trust ("REIT"). American Management, which currently is a
wholly-owned subsidiary of IGC, acquired IGC's United States property
management services operations. It is a Delaware corporation and will be taxed
as a corporation. American Land will acquire IGC's principal United States
community development assets and operations, principally land in St. Charles,
Maryland. American Land is a Maryland corporation and will be taxed as a
corporation. IGP Group will acquire substantially all of IGC's interests in
its affiliate Interstate General Properties Limited Partnership S.E. ("IGP"),
which will continue to hold its interests in Puerto Rico investment apartment
properties, Puerto Rico management services and the rights to income, gains
and losses associated with land in Puerto Rico held by a subsidiary of IGP,
Land Development Associates S.E. ("LDA"), for development as rental
properties. A Class B interest in IGP will be transferred to American Land
(the "Class B IGP Interest"). This interest will represent all of IGP's rights
to income, gains and losses associated with land in Puerto Rico held by LDA
that currently is designated for development as saleable property. IGP Group
intends to qualify as a Puerto Rico pass-through entity that is expected to be
taxed as a corporation for U.S. tax purposes and will not be taxable at the
entity level for Puerto Rico income tax purposes.
After these asset transfers have been completed, IGC will distribute all of
the outstanding common shares of ACPT to the general and limited partners
(including Unitholders) of IGC pro rata in accordance with their percentage
interest in IGC. IGC Unitholders in the aggregate will receive 99% of ACPT's
common shares on the basis of one ACPT common share for every two IGC Units
held. Based on the number of IGC Units currently outstanding, approximately
5,250,000 ACPT common shares will be distributed. As of December 31, 1997 and
March 31, 1998, the Net Asset Value per common share of ACPT is estimated by
IGC to be $21.25 and $21.55, respectively, based on appraisals of land assets
and valuation of interest in apartment properties, management contracts and
other assets. ACPT has received preliminary approval for listing of the common
shares on the American Stock Exchange ("AMEX") and the Pacific Stock Exchange
("PSE").
<PAGE>
Also in connection with the Restructuring, subject to prevailing market
conditions, ACPT will seek to raise up to $35 million in additional equity
capital through a private offering of preferred shares (the "Private
Offering"). Proceeds from the Private Offering would be used to pay down
existing bank debt and for working capital. The terms of the preferred shares
will be negotiated with purchasers, but they may include rights to preferred
distributions, cumulative distributions, and/or liquidation preferences. The
preferred shares also may be convertible into common shares at a negotiated
conversion ratio. The Private Offering, if completed, would result in dilution
of the percentage interest of all ACPT shareholders including the Wilson
Family, whose percentage ownership would likely be reduced below 40%.
Regardless of the outcome of the Private Offering, the Wilson Family intends
to take such other actions as may be necessary to reduce its percentage
interest to below 40% in order to permit American Rental to qualify as a REIT.
After the Restructuring, IGC will continue to own certain assets that in
management's view do not fit ACPT's business plan. These include the Towne
Center land in St. Charles, Maryland, which has been the subject of the
wetlands litigation, certain single family home lots in the Dorchester
neighborhood in St. Charles, certain land in Pomfret, Maryland and St. Mary's
County, Maryland, a 50% interest in a partnership that owns land in
Brandywine, Maryland, all of the shares of AFH, rights to collect the
principal balance of a note in the amount of $6.77 million payable by a
subsidiary of ACPT, as well as fractional interests in Chastleton Apartment
Associates, L.P. and Coachman's L.P. IGC conditionally has agreed to transfer
to American Land 14 acres of commercial land in St. Charles, having an
appraised gross retail value as of December 31, 1996 of $4,214,000, if and
when IGC settles the wetlands litigation on terms approved by the Board of
Directors of IGMC, provided that IGC shall have received confirmation that the
transfer of the land (and resulting decrease in the value of IGC's assets)
will not cause the IGC Units to be delisted from AMEX or the PSE. If IGC is
unable to settle the wetlands litigation on satisfactory terms or IGC does not
receive confirmation of the continued listing of IGC Units, IGC also will
retain this commercial land. Substantially all of the common stock of IWT and
CWT (excluding shares issued as incentive compensation for employees) will be
held in a trust for the benefit of IGC Unitholders (the "CWT Trust"). Prior to
contributing IWT and CWT stock to the CWT Trust, IGC will capitalize these
entities with $1 million cash, certain residential lots in the Montclair
development of Prince William County, Virginia, and a note payable by a third
party in the amount of $1.06 million. Our goal is to place AFH, CWT and IWT on
a sound financial footing so that they can be sold or distributed to IGC
Unitholders. The AMEX and the PSE have advised that they will continue the
listing of IGC Units following the Restructuring.
We have scheduled a special meeting of the IGC Unitholders to vote on the
Restructuring. The special meeting will be held on August 31, 1998, at 10:00
a.m. (local time), at The Willard Intercontinental Hotel, Washington, D.C. The
record date for IGC Unitholders entitled to vote at the special meeting is
August 10, 1998. The Restructuring cannot be completed without approval of the
IGC Unitholders by a vote of (i) the holders of a majority of the outstanding
IGC Units, and (ii) a majority of the IGC Units not held by the Wilson Family
that are present and voting at the meeting. The Restructuring also is
contingent upon the management of IGC determining that IGC will be classified
as a partnership for federal income tax purposes for 1998.
THE BOARD OF DIRECTORS OF INTERSTATE GENERAL MANAGEMENT CORPORATION, IGC'S
MANAGING GENERAL PARTNER, BY UNANIMOUS VOTE, HAS APPROVED THE RESTRUCTURING
AND RECOMMENDS THAT THE IGC UNITHOLDERS VOTE FOR APPROVING THE RESTRUCTURING.
Whether or not you plan to attend the special meeting of IGC Unitholders,
please take the time to vote by completing and mailing the enclosed proxy card
to us. If you sign, date and mail your proxy card without indicating how you
want to vote, your proxy will be counted as a vote in favor of the
Restructuring. If you fail to return your card, your Units will not be voted
on the Restructuring proposal.
2
<PAGE>
This Proxy Statement is first being mailed to IGC Unitholders on August 11,
1998. It provides you with detailed information about the proposed
Restructuring. It is a prospectus for the ACPT common shares and also a Proxy
Statement for the special meeting of IGC Unitholders. We encourage you to read
this entire document carefully.
Sincerely,
/s/ James J. Wilson
James J. Wilson
Chairman and Chief Executive Officer
3
<PAGE>
PROXY STATEMENT/PROSPECTUS
DISTRIBUTION OF UP TO 5,250,000 COMMON SHARES
OF
AMERICAN COMMUNITY PROPERTIES TRUST
TO THE
UNITHOLDERS OF INTERSTATE GENERAL COMPANY L.P.
---------------
This Proxy Statement/Prospectus relates to a proposal to transfer the
principal real estate assets and operations of Interstate General Company L.P.
("IGC") to American Community Properties Trust ("ACPT") and to distribute to
the partners of IGC, including holders (the "IGC Unitholders") of Class A
Units of IGC ("IGC Units"), all of the common shares of beneficial interest of
ACPT (the "Common Shares") (the "Restructuring"). ACPT was formed as a real
estate investment trust under Article 8 of the Maryland Corporations and
Associations Law (the "Maryland Trust Law") but is expected to be taxed as a
partnership. At a special meeting to be held on August 31, 1998, IGC
Unitholders of record on August 10, 1998 (the "Record Date") will have an
opportunity to vote on the Restructuring. If the Restructuring is approved,
IGC Unitholders will not be required to surrender their IGC Units or otherwise
pay IGC anything to receive the Common Shares.
ACPT has received preliminary approval for listing of the Common Shares on
the American Stock Exchange (the "AMEX") and the Pacific Stock Exchange (the
"PSE"). IGC Units will continue to be listed on AMEX and the PSE following the
Restructuring.
The Proxy Statement/Prospectus does not cover resales of ACPT Common Shares
received by IGC Unitholders in the Restructuring, and no person is authorized
to make use of this Proxy Statement/Prospectus in connection with any such
resale.
---------------
SEE "RISK FACTORS" ON PAGE 29 FOR CERTAIN FACTORS RELEVANT TO THE
RESTRUCTURING AND INVESTMENT IN THE COMMON SHARES, INCLUDING:
. ABSENCE OF DISSENTERS' APPRAISAL RIGHTS; ALL IGC UNITHOLDERS WILL BE
BOUND BY THE VOTE OF THE HOLDERS OF A MAJORITY OF THE OUTSTANDING IGC
UNITS AND A MAJORITY OF THE VOTES CAST BY IGC UNITHOLDERS NOT AFFILIATED
WITH MEMBERS OF THE FAMILY OF JAMES J. WILSON (THE "WILSON FAMILY").
. MEMBERS OF THE WILSON FAMILY WILL BE ABLE TO EXERT SUBSTANTIAL CONTROL
OVER VOTES ON MATTERS AFFECTING ACPT THROUGH THEIR CONTROL OF CERTAIN
SHAREHOLDERS. IN ADDITION, ACPT IS SUBJECT TO OTHER CONFLICTS OF INTEREST
ARISING OUT OF ITS RELATIONSHIPS WITH CERTAIN SHAREHOLDERS, MEMBERS OF
MANAGEMENT, AND THEIR AFFILIATES. CERTAIN ACTIONS OR DECISIONS BY THESE
PARTIES MAY HAVE AN ADVERSE EFFECT ON THE INTERESTS OF SHAREHOLDERS.
. THERE IS NO GUARANTEE THAT A PUBLIC MARKET FOR COMMON SHARES WILL DEVELOP
OR BE SUSTAINED AFTER THE DISTRIBUTION.
. IF IN RESPECT OF CLAIMS BY IGC CREDITORS, IT WERE TO BE DETERMINED THAT
THE DISTRIBUTION RENDERED IGC INSOLVENT OR OTHERWISE CONSTITUTED A
FRAUDULENT TRANSFER OR CONVEYANCE, IGC UNITHOLDERS WHO RECEIVE THE
DISTRIBUTION COULD BE REQUIRED TO RETURN THE COMMON SHARES (OR EQUIVALENT
AMOUNTS) TO IGC OR ITS CREDITORS.
. THE AGGREGATE PRICES AT WHICH THE COMMON SHARES AND IGC UNITS TRADE AFTER
THE DISTRIBUTION MAY BE LOWER THAN THE PRICES AT WHICH THE IGC UNITS
TRADED BEFORE THE DISTRIBUTION.
. THE RESTRUCTURING IS SUBJECT TO OBTAINING THE APPROVALS OF CERTAIN
GOVERNMENT ENTITIES, INCLUDING HUD, CERTAIN IGC LENDERS, AND CERTAIN
LIMITED PARTNER INVESTORS IN THE U.S. APARTMENT PARTNERSHIPS.
. AS A RESULT OF CERTAIN ASSET TRANSFERS PRIOR TO THE RESTRUCTURING,
APPROXIMATELY $6.1 MILLION IN GAIN WILL BE RECOGNIZED BY IGC. IGC HAS
DETERMINED THAT THIS GAIN WILL BE ALLOCATED SOLELY TO A CORPORATION OWNED
BY THE WILSON FAMILY. IF IGC'S ALLOCATION OF SUCH GAIN IS SUCCESSFULLY
CHALLENGED BY THE IRS, A PORTION OF SUCH GAIN MAY BE ALLOCATED TO IGC
UNITHOLDERS.
. THERE ARE SIGNIFICANT TAX ISSUES ASSOCIATED WITH THE REORGANIZATION FOR
WHICH DEFINITIVE GUIDELINES DO NOT EXIST. IF ONE OR MORE OF THESE ISSUES
IS ULTIMATELY DETERMINED CONTRARY TO THE OPINION OF COUNSEL, IT WOULD
RESULT IN INCREASED TAX AT ONE OR MORE ENTITY LEVELS WITHIN THE ACPT
STRUCTURE AND COULD MATERIALLY DECREASE AMOUNTS AVAILABLE FOR
DISTRIBUTION BY ACPT TO SHAREHOLDERS.
. THE BUSINESS OF ACPT WILL BE SUBJECT TO CERTAIN REAL ESTATE FINANCING
RISKS, INCLUDING RISING INTEREST RATES, DEBT FINANCING RISKS, RISKS
ASSOCIATED WITH FINANCING NEW DEVELOPMENTS THROUGH CONSTRUCTION LOANS,
AND RISKS ASSOCIATED WITH SALE AND FORECLOSURE.
. THE BUSINESS OF ACPT WILL BE SUBJECT TO CERTAIN REAL ESTATE INVESTMENT
RISKS, INCLUDING OPERATING RISKS ASSOCIATED WITH REAL ESTATE, DEVELOPMENT
RISKS, SUCH AS ZONING APPROVALS, THE POTENTIAL APPLICATION OF FEDERAL AND
STATE ENVIRONMENTAL LAWS AND FEDERAL LAWS RELATING TO DISABLED PERSONS,
AND CHANGES IN TAX LAWS AND BUILDING SAFETY REGULATIONS, AND COMPETITIVE
RISKS FROM OTHER ENTITIES.
. ACPT'S U.S. AND PUERTO RICO APARTMENT PROPERTIES, AND ITS DEVELOPMENT OF
FUTURE PROJECTS, COULD BE ADVERSELY AFFECTED BY CHANGES IN GOVERNMENT
REGULATIONS THAT RESTRICT SUBSIDY PROGRAMS FOR NEW CONSTRUCTION OF LOW
AND MODERATE INCOME HOUSING BY DEVELOPERS SUCH AS ACPT.
. THE TRANSFERABILITY AND OWNERSHIP OF ACPT COMMON SHARES WILL BE
RESTRICTED INSOFAR AS NO SHAREHOLDER (OTHER THAN CERTAIN CURRENT IGC
UNITHOLDERS) MAY OWN MORE THAN 2% OF THE OUTSTANDING COMMON SHARES.
. OTHER PROVISIONS IN ACPT'S ORGANIZATIONAL DOCUMENTS MAY HAVE THE EFFECT
OF DISCOURAGING A CHANGE IN CONTROL.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------
The date of this Proxy Statement/Prospectus is August 10, 1998.
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN OR INCORPORATED BY REFERENCE INTO
THIS PROXY STATEMENT/PROSPECTUS IN CONNECTION WITH THE OFFERING OF SECURITIES
MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY ACPT OR IGC. NEITHER THE DELIVERY
OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF THE COMMON SHARES
OFFERED HEREBY SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF ACPT OR IGC SINCE THE DATE HEREOF OR THAT
THE INFORMATION SET FORTH OR INCORPORATED BY REFERENCE HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE. THIS PROXY STATEMENT/PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, ANY
SECURITIES IN ANY JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION OF AN OFFER.
AVAILABLE INFORMATION
IGC is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith,
files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports and other information filed by IGC can
be inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's Regional Offices at Seven World Trade Center, 13th Floor, New
York, New York 10048 and CitiCorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60621-2511. Copies of such material can be obtained by mail
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Such reports and other
information may also be obtained from the web site that the Commission
maintains at http://www.sec.gov. In addition, reports and other information
concerning IGC may be inspected at the offices of the American Stock Exchange,
Inc., 86 Trinity Place, New York, New York 10006-1829.
Reports and other information concerning IGC may also be obtained
electronically through a variety of databases, including, among others, the
Commission's Electronic Data Gathering and Retrieval ("EDGAR") program,
Knight-Ridder Information Inc., Federal Filing/Dow Jones and Lexis/Nexis.
ACPT has filed with the Commission a Registration Statement on Form S-11
(together with all amendments, supplements and exhibits thereto, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the Common Shares to be issued pursuant to
the Restructuring. This Proxy Statement/Prospectus does not contain all of the
information set forth in the Registration Statement, certain parts of which
have been omitted in accordance with the rules and regulations of the
Commission. For further information, reference is hereby made to the
Registration Statement. Any statements contained herein concerning the
provisions of any document filed as an exhibit to the Registration Statement
or otherwise filed with the Commission are not necessarily complete, and in
each instance reference is made to the copy of such document so filed. Each
such statement is qualified in its entirety by such reference.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
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AVAILABLE INFORMATION.................................................... 2
SUMMARY.................................................................. 10
Overview............................................................... 10
Organizational Charts.................................................. 10
IGC Prior to the Restructuring......................................... 11
ACPT Following the Restructuring....................................... 12
IGC Following the Restructuring........................................ 13
Summary Risk Factors................................................... 14
Recommendation of the Board of Directors of IGMC....................... 16
The Special Meeting.................................................... 16
Principal Advantages of the Restructuring.............................. 17
Broader Market for Common Shares than for IGC Units.................. 17
No History of Wetlands Litigation.................................... 17
No Adverse Financial Effects from AFH, IWT, and CWT.................. 17
Simplified Tax Reporting............................................. 17
Enhanced Financing Opportunities..................................... 17
Election of Trustees by Shareholders................................. 18
Principal Disadvantages of the Restructuring........................... 18
No Cash Distributions to IGC Unitholders............................. 18
Tax Liabilities...................................................... 18
Reduction of Required Distributions.................................. 19
Antitakeover Effects................................................. 19
Restrictions on Accumulation of Common Shares........................ 19
Mechanics of the Restructuring......................................... 19
The Asset Transfers.................................................. 19
The Distribution..................................................... 20
Assets Retained by IGC............................................... 20
Appraisals............................................................. 21
Properties Retained by IGC........................................... 21
Properties Transferred to ACPT....................................... 21
The Commercial Parcel.................................................. 21
Background of the Restructuring; Consideration of Alternatives......... 21
Benefits to Insiders................................................... 22
The Private Offering................................................... 23
No Dissenters' Appraisal Rights........................................ 24
Conflicts of Interest.................................................. 24
Tax Consequences of the Restructuring for U.S. Unitholders and Share-
holders............................................................... 24
Tax Consequences of the Restructuring for Puerto Rico Unitholders and
Shareholders.......................................................... 24
Comparison of Operations of ACPT and IGC............................... 24
Comparative Rights of IGC Unitholders and Shareholders................. 25
Summary Combined Historical and Pro Forma Financial and Operating Da-
ta.................................................................... 27
RISK FACTORS............................................................. 29
Restructuring Risks.................................................... 29
No Dissenters' Appraisal Rights...................................... 29
Control of ACPT...................................................... 29
Conflicts of Interest................................................ 29
Absence of Existing Trading Market for Common Shares................. 29
Change in Value of Securities; Trading Price Less than Net Asset Val-
ue.................................................................. 29
Antitakeover Effects................................................. 30
Ownership Limitation................................................. 30
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Potential Effects of Issuance of Additional Shares................... 30
Dependence on Key Personnel; Withdrawal of James J. Wilson from Man-
agement............................................................. 31
Change in the Rights of IGC Unitholders.............................. 31
Possible Adverse Effect of Market Interest Rates on Price of Common
Shares.............................................................. 31
Approvals Required to Effect the Restructuring....................... 31
Potential Return of ACPT Shares...................................... 31
Real Estate Financing Risks............................................ 32
Rising Interest Rates................................................ 32
Debt Financing and Potential Adverse Effects on Cash Flows and Dis-
tributions.......................................................... 32
Construction Loans and Risks Associated with Sale or Foreclosure..... 32
Changes in Policies Without Shareholder Approval..................... 33
Real Estate Investment Risks........................................... 33
General Risks........................................................ 33
Operating Risks...................................................... 34
Development of St. Charles........................................... 34
Litigation Involving St. Charles Development......................... 34
Termination of HUD Subsidy Contracts; New Apartment Development...... 35
Competition.......................................................... 35
Possible Environmental Liabilities................................... 36
Effect of Americans with Disabilities Act Compliance on Cash Flow and
Distribution........................................................ 36
Change in Tax Laws; Building Safety Regulations...................... 37
Uninsured Loss....................................................... 37
Risks Involved in Property Ownership Through Partnerships, Limited
Liability Companies, and Joint Ventures............................. 37
Risks Associated with Illiquidity of Real Estate..................... 37
Risks Associated with Acquisition, Development and Construction...... 38
Tax Related Risks...................................................... 38
Gain Recognized on Asset Transfers................................... 38
Risk of Gain and Reduced Distributions if IGC is not Classified as a
Partnership......................................................... 39
Corporate Level Taxes Reduce Amounts Available for Distribution...... 40
Reduced Distributions and Share Value if American Rental does not
Qualify as a REIT................................................... 40
Reduced Distributions and Loss of Tax Credits Upon Reclassification
of IGP Group........................................................ 41
Possible Tax Liabilities in Excess of Cash Distributions............. 41
Reduced Dividends and Share Value if ACPT is not Classified as a
Partnership......................................................... 42
Limitations on Availability of Foreign Tax Credits................... 42
Sale by ACPT of Subsidiary Entities Could Affect Fungibility and
Value of Shares..................................................... 42
Guidance on Recent Changes in Law and Legislative Proposals May Have
Adverse Consequences................................................ 42
THE SPECIAL MEETING...................................................... 43
Matters Presented for Vote............................................. 43
Recommendation of the Board of Directors of IGMC....................... 43
IGC Units Eligible to Vote on the Restructuring........................ 43
Required Vote.......................................................... 44
Broker Non-Votes and Abstentions....................................... 44
Proxies................................................................ 44
Revocation of Proxies.................................................. 44
Solicitations by IGC Management........................................ 45
No Dissenters' Appraisal Rights........................................ 45
THE RESTRUCTURING........................................................ 45
Reasons for the Restructuring.......................................... 45
The Asset Transfers.................................................... 45
</TABLE>
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American Rental..................................................... 45
American Management................................................. 46
American Land....................................................... 46
IGP Group........................................................... 46
The Distribution...................................................... 47
Relationship between IGC and ACPT after the Distribution.............. 48
No Overlapping Management........................................... 48
Banc One Financing.................................................. 48
NationsBank Letter of Credit........................................ 48
Assets Retained by IGC................................................ 48
Approvals Required to Effect the Restructuring........................ 49
Background of the Restructuring; Consideration of Alternatives........ 49
Disadvantages of Current Structure.................................. 49
Alternatives Considered............................................. 50
The Private Offering.................................................. 52
Principal Advantages of the Restructuring............................. 52
Broader Market for Common Shares than for IGC Units................. 52
No History of Wetlands Litigation................................... 52
No Adverse Financial Effects from AFH, IWT and CWT.................. 52
Simplified Tax Reporting............................................ 52
Enhanced Financing Opportunities.................................... 52
Election of Trustees by Shareholders................................ 53
Principal Disadvantages of the Restructuring.......................... 53
No Cash Distributions to IGC Unitholders............................ 53
Tax Liabilities..................................................... 53
Reduction of Required Distributions................................. 53
Antitakeover Effects................................................ 54
Restrictions on Accumulation of Common Shares....................... 54
ACPT PRO FORMA COMBINED FINANCIAL DATA.................................. 54
ACPT.................................................................... 60
DISTRIBUTION POLICY..................................................... 60
CAPITALIZATION.......................................................... 61
MARKET PRICES AND DISTRIBUTIONS......................................... 62
SELECTED COMBINED HISTORICAL FINANCIAL AND OPERATING DATA OF AMERICAN
COMMUNITY PORTFOLIO PROPERTIES......................................... 63
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINAN-
CIAL CONDITION......................................................... 65
General............................................................... 65
Results of Operations For the Three Months Ended March 31, 1998 and
1997................................................................. 65
Community Development Operations...................................... 65
Rental Property Revenues, Net of Operating Expenses................... 65
Equity in Earnings from Partnerships and Developer Fees............... 65
Management and Other Fees............................................. 66
Interest Expense...................................................... 66
General and Administrative Expense.................................... 66
Spin-Off Costs........................................................ 66
For the Years Ended December 31, 1997 and 1996........................ 66
Community Development Operations.................................... 66
Rental Property Revenues, Net of Operating Expenses................. 66
Equity in Earnings from Partnerships and Developer Fees............. 66
Management and Other Fees........................................... 66
Interest Expense.................................................... 67
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General and Administrative Expense................................... 67
Spin-Off Costs....................................................... 67
For the Years Ended December 31, 1996 and 1995......................... 67
Community Development Operations..................................... 67
Rental Property Revenues Net of Operating Expenses................... 67
Equity in Earnings from Partnerships and Developer Fees.............. 67
Management and Other Fees............................................ 67
Interest Expense..................................................... 68
General and Administrative Expense................................... 68
Liquidity and Capital Resources........................................ 68
Debt Summary........................................................... 69
Material Negative Debt Covenants....................................... 70
Year 2000.............................................................. 70
Forward-Looking Statements............................................. 70
BUSINESS AND PROPERTIES OF ACPT.......................................... 71
Rental Apartment Properties............................................ 71
United States........................................................ 71
Puerto Rico.......................................................... 73
Government Regulation................................................ 74
Competition.......................................................... 75
Condominium Conversion................................................. 75
Puerto Rico.......................................................... 75
United States........................................................ 76
Community Development.................................................. 76
St. Charles.......................................................... 76
Government Approvals............................................... 77
Competition........................................................ 77
Environmental Impact............................................... 77
Parque Escorial...................................................... 78
Government Approvals............................................... 78
Competition........................................................ 78
Environmental Impact............................................... 78
Commercial Rental Properties........................................... 78
Property Management.................................................... 79
Homebuilding in Puerto Rico............................................ 79
Policies with Respect to Certain Activities............................ 79
Investment Policies.................................................. 80
Investment in Real Estate or Interests in Real Estate.............. 80
Investment in Real Estate Mortgages................................ 80
Securities of or Interests in Persons Primarily Engaged in
Real Estate Activities and Other Issuers........................... 80
Affiliate Transaction Policy......................................... 80
Certain Other Policies............................................... 80
APPRAISALS............................................................... 81
Properties Transferred to ACPT......................................... 81
Parque Escorial Planned Community, San Juan/Carolina, Puerto Rico.... 81
Canovanas Property, Canovanas, Puerto Rico........................... 81
Smallwood Village, Westlake Village, Wooded Glen, and Piney Reach of
the St. Charles Planned Unit Development and Surrounding Environs,
St. Charles, MD..................................................... 81
Fairway Village (Residential), St. Charles, MD....................... 82
Fairway Village (Commercial), St. Charles, MD........................ 82
</TABLE>
6
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<TABLE>
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Properties Retained by IGC............................................... 83
Brandywine Village, Brandywine, MD..................................... 83
Southlake at Montclair Subdivisions Section S-4, Dumfries, VA.......... 83
Westbury, Phase II Section I, Lexington Park, MD....................... 83
Pomfret Property, Waldorf, MD.......................................... 84
26 Single Family Lots, Dorchester Village, St. Charles, MD............. 84
The Commercial Parcel.................................................... 84
Parcels A-3 & A-4, Westlake Village, St Charles, MD.................... 84
General.................................................................. 84
LEGAL PROCEEDINGS.......................................................... 85
ACPT..................................................................... 85
IGC...................................................................... 85
Wetlands Litigation.................................................... 85
Other Litigation....................................................... 86
IGC CONSOLIDATED FINANCIAL DATA............................................ 87
IGC AFTER THE RESTRUCTURING................................................ 95
No Change in Partnership Structure....................................... 95
Management of IGC........................................................ 95
Description of IGC's Continuing Business................................. 95
Real Estate Development................................................ 95
Brandywine........................................................... 95
Pomfret.............................................................. 96
Westbury............................................................. 96
St. Charles Parcel................................................... 96
Dorchester........................................................... 96
Wetlands Properties.................................................. 96
Interstate Waste Technologies; CWT Trust............................... 96
American Family Homes.................................................. 97
Listing of IGC Units..................................................... 97
Creditors Rights......................................................... 97
MANAGEMENT OF ACPT......................................................... 98
ACPT Board of Trustees................................................... 98
ACPT Trustees and Executive Officers..................................... 98
Committees of the ACPT Board of Trustees................................. 99
Audit Committee........................................................ 99
Compensation Committee................................................. 100
Nominating Committee................................................... 100
Compensation of ACPT Trustees............................................ 100
Executive Compensation................................................... 100
Employment Agreements.................................................... 100
Share Incentive Plans.................................................... 101
Employee Plan.......................................................... 101
Trustees Plan.......................................................... 101
Treatment of IGC Options and Unit Appreciation Rights.................... 101
Retirement Plans......................................................... 102
OWNERSHIP OF COMMON SHARES................................................. 103
TRANSACTIONS WITH RELATED PARTIES.......................................... 104
Staggered Transfer of Partnership Interests to American Housing.......... 104
Consulting Agreement..................................................... 104
Banc One Financing....................................................... 105
Joint Litigation with Charles County..................................... 105
</TABLE>
7
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Services of Whitman, Requardt.......................................... 105
NationsBank Letter of Credit........................................... 105
Payments to IBC for Services Provided by J. Michael Wilson............. 106
Land Sale to IBC Affiliate............................................. 106
Sale of Management Fee Receivables..................................... 106
Receivables from Land Sales to Former Director......................... 106
Apartment Management Services.......................................... 106
LDA Receivable......................................................... 106
INCOME TAX CONSIDERATIONS................................................ 106
Federal Income Tax Considerations...................................... 106
Federal Income Tax Classification of IGC............................. 108
Federal Income Tax Classification of ACPT............................ 110
Counsel's Opinion of Federal Income Tax Classification of ACPT..... 112
Federal Income Tax Classification of American Rental................. 113
REIT Qualification................................................. 113
General REIT Qualification Requirements, Ownership Structure, and
Stapled Stock Rules............................................... 113
Share Ownership, Reporting......................................... 115
Sources of Gross Income............................................ 117
75% Gross Income Test.............................................. 117
95% Gross Income Test.............................................. 119
Failing the 75% or 95% Tests; Reasonable Cause..................... 119
Character of Assets Owned.......................................... 119
Annual Distributions to Shareholders............................... 120
Taxation of American Rental as a REIT.............................. 121
Failure to Qualify as a REIT....................................... 121
Counsel's Opinion Relating to Qualification of American Rental as a
REIT.............................................................. 122
Federal Income Tax Classification of American Housing and American
Housing Management Company.......................................... 124
Federal Income Tax Classification of American Land and American
Management.......................................................... 124
Federal Income Tax Classification of IGP Group....................... 125
Certain Tax Consequences of the Asset Transfers...................... 125
Federal Income Tax Consequences of the Distribution.................. 127
Federal Income Taxation of ACPT and Shareholders..................... 128
General............................................................ 128
Tax Basis of Common Shares......................................... 128
Income and Loss Allocations........................................ 128
Coordination of Allocations and Distributions...................... 129
Section 704(c) Allocations......................................... 129
Section 754 Election............................................... 129
Passive Loss and Income............................................ 130
Taxation of Foreign Investors...................................... 130
Taxation of Shareholder Distributions Other than in Liquidation.... 130
Foreign Tax Credit................................................. 130
Termination of ACPT for Tax Purposes............................... 132
Backup Withholding................................................. 132
Sale or Exchange of Common Shares.................................. 133
Dissolution of ACPT................................................ 133
Puerto Rico Shareholders........................................... 134
Certain Federal Income Tax Consequences to Tax Exempt
Organizations..................................................... 135
Information Return Filing Requirements............................. 135
</TABLE>
8
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Electing Large Partnerships......................................... 136
Audit of Partnership Tax Returns and Further Proceedings............ 136
Penalty for Substantial Understatement; Deduction of Interest....... 136
Certain State Income Tax and Puerto Rico Income Tax Considerations....... 137
Certain State Tax Considerations....................................... 137
Certain Puerto Rico Income Tax Considerations.......................... 137
Puerto Rico Income Tax Classification of ACPT and IGP Group.......... 138
Puerto Rico Income Taxation of the Distribution...................... 138
United States Shareholders.......................................... 138
Puerto Rico Shareholders............................................ 139
Puerto Rico Income Taxation of ACPT.................................. 139
Puerto Rico Income Taxation of IGP Group............................. 139
Puerto Rico Counsel's Opinions of Puerto Rico Taxation of ACPT and
IGP Group........................................................... 140
Certain Puerto Rico Income Tax Consequences to Shareholders.......... 140
United States Shareholders.......................................... 140
Puerto Rico Shareholders............................................ 140
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST.............................. 141
General................................................................. 141
Common Shares........................................................... 141
Preferred Shares........................................................ 142
Transfer Agent.......................................................... 142
CERTAIN PROVISIONS OF MARYLAND LAW AND OF ACPT'S DECLARATION OF TRUST AND
BYLAWS................................................................... 142
Classification of the Board of Trustees................................. 142
Independent Trustees.................................................... 143
Removal of Trustees..................................................... 143
Required Minimum Distributions.......................................... 143
Supermajority Voting.................................................... 143
Business Combinations................................................... 143
Control Share Acquisitions.............................................. 144
Amendment of Declaration of Trust and Bylaws............................ 145
Limitation of Liability and Indemnification............................. 145
Dissolution of ACPT..................................................... 145
Possible Antitakeover Effect of Certain Provisions of Maryland Law and
of the Declaration of Trust and Bylaws................................. 146
Maryland Asset Requirements............................................. 146
COMPARATIVE RIGHTS OF IGC UNITHOLDERS AND SHAREHOLDERS.................... 146
General................................................................. 146
Management.............................................................. 146
Required Minimum Distributions.......................................... 146
Voting Rights........................................................... 147
Meetings................................................................ 147
Amendment of Declaration of Trust, Bylaws and Partnership Agreement..... 147
Limited Liability....................................................... 147
Dissolution of the Partnership and ACPT................................. 148
Liquidation Rights...................................................... 148
Limitations of Liability of General Partners and Trustees............... 148
Indemnification......................................................... 148
Ownership Limitations................................................... 148
LEGAL MATTERS............................................................. 148
EXPERTS................................................................... 149
REPORTS TO SHAREHOLDERS................................................... 149
GLOSSARY.................................................................. 150
FINANCIAL STATEMENTS...................................................... F-1
</TABLE>
9
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SUMMARY
The following is a summary of certain information contained elsewhere in this
Proxy Statement/Prospectus. Reference is made to, and this Summary is qualified
in its entirety by, the more detailed information contained elsewhere in this
Proxy Statement/Prospectus. As used in this Proxy Statement/Prospectus, the
term "IGC" means Interstate General Company L.P., a Delaware limited
partnership, the term "ACPT" means American Community Properties Trust, a
Maryland investment trust, the term "IGMC" means Interstate General Management
Corporation, a Delaware corporation, and the managing general partner of IGC,
the term "IBC" means Interstate Business Corporation, a Delaware corporation
and a general partner of IGC. Unless otherwise defined herein, capitalized
terms used in this Summary have the meanings ascribed to them elsewhere in this
Proxy Statement/Prospectus. IGC Unitholders are urged to read this Proxy
Statement/Prospectus in its entirety.
OVERVIEW
This Proxy Statement/Prospectus relates to a proposal to transfer the
principal real estate operations and assets of IGC to ACPT and to distribute to
the partners of IGC, including the IGC Unitholders, all of the Common Shares of
ACPT. ACPT was organized in March 1997 for purposes of consummating the
Restructuring and currently is a wholly-owned subsidiary of IGC. Prior to
completion of the Asset Transfers (as described below), ACPT will own no
assets. ACPT was formed as a real estate investment trust under Article 8 of
the Maryland Trust Law but is expected to be taxed as a partnership. Under the
Maryland Trust Law, at least 75% of the value of ACPT's assets must be held,
directly or indirectly, in real estate assets, mortgages and mortgage related
securities, government securities, and cash and cash equivalent items.
The purpose of these transactions is to create an investment vehicle whose
principal income is dividends from corporations engaged principally in real
estate businesses. This should be a more attractive investment for pension
funds and mutual funds than is IGC as a master limited partnership engaged in
both real estate and non real estate businesses. ACPT will not have any
operating income. Management expects that ACPT will have greater access to
capital markets than IGC has had.
In addition, ACPT will not be burdened with the operating losses and capital
needs of American Family Homes, LLC ("AFH"), the capital needs of Interstate
Waste Technologies, Inc. ("IWT") and Caribe Waste Technologies, Inc. ("CWT") or
the parcels of land encumbered by the IGC wetlands litigation. All of these
assets will be retained by IGC. See "The Restructuring--Reasons for the
Restructuring." The contemplated transactions include (i) the transfer to ACPT
of substantially all of IGC's U.S. community development assets, investment
apartment property, and property management services assets, its similar assets
in Puerto Rico and its Puerto Rico homebuilding operations (the "Asset
Transfers"), and (ii) the distribution of all of the Common Shares of ACPT to
the partners of IGC, including the IGC Unitholders (the "Distribution"). These
transactions are sometimes collectively referred to herein as the
"Restructuring."
In addition, in connection with the Restructuring, and subject to market
conditions, ACPT will seek to raise up to $35 million in additional equity
capital through a private offering of preferred shares (the "Private
Offering"). See "The Restructuring--The Private Offering."
ORGANIZATIONAL CHARTS.
The following organizational charts graphically depict the transactions
constituting the Restructuring.
10
<PAGE>
IGC PRIOR TO THE RESTRUCTURING
The following chart depicts the organizational structure of IGC and its
subsidiaries immediately prior to the Restructuring. St. Charles Operating Co.
LLC owns the Wetlands Properties, including the Towne Center South land, and
IGC directly holds the Westbury and Montclair land.
[FLOW CHART APPEARS HERE]
(1) Includes Wilson Family 52% ownership interest, of which 29.75% is
attributable to IBC and 11.32% to Wilson Securities Capital.
(2) James J. Wilson is a general partner without a percentage interest in IGP
and is entitled to certain preferential distributions therefrom.
(3) Remaining 50% interest owned by VMV Enterprises Corporation, an unrelated
third party.
(4) Remaining 99% interest owned by IBC.
(5) IGP will own 99% directly and 1% indirectly through IGP's wholly-owned
subsidiary, LDA Group LLC.
(6) IGP liquidation percentage interest in the 12 apartment facilities owned
by 9 Puerto Rico Apartment Partnerships as follows: 1) San Anton - 49.5%;
2) Monserrate I - 52.5%; 3) Alturas de Senorial - 50%; 4) Jardines de
Caparra - 50%; 5) Colinas de San Juan - 50%; 6) Bayamon Gardens - 50%; 7)
Vistas del Jurabo - 50%; 8) Monserrate II - 50%; 9) Santa Juana - 50%; 10)
Torre De La Cumbres - 50%; 11) De Diego - 50%; and 12) Valle del Sol - 50%.
(7) Remaining 1% interest owned by IBC.
(8) Remaining 50% interest owned by JCP Realty, Inc., Simon DeBartolo, and
Montgomery Ward & Co. unrelated third parties.
(9) IGC liquidation percentage interest in U.S. Apartment Partnerships as
follows: 1) Bannister Associates - 60%; 2) Brookside Gardens - 1%; 3)
Crossland Associates - 60%; 4) Fox Chase Apartments - 99.9%; 5) Headen
House Associates - 75.5%; 6) Huntington Associates - 50%; 7) Lakeside
Apartments - 50%; 8) New Forest Apartments - 99.9%; 9) Palmer Apartment
Associates - 75.5%; 10) Wakefield Terrace Associates - 75.5%; 11) Wakefield
Third Age Associates - 75.5%; 12) Essex Apartment Associates - 50%; and 13)
Lancaster Apartments - 50%.
(10) Remaining 99.98% interest owned by IBC.
(11) Remaining 58.97% interest distributed among 68 unrelated third party
limited partners.
(12) Remaining 99.99% interest owned by IBC.
11
<PAGE>
ACPT FOLLOWING THE RESTRUCTURING
The following chart depicts the organizational structure of ACPT and its
subsidiaries following completion of the Restructuring.
[FLOW CHART APPEARS HERE]
NOTES:
- ------
(1) Includes 52% Wilson Family interest immediately following the Distribution,
of which 29.75% is attributable to IBC and 11.32% to Wilson Securities
Corporation.
(2) ACPT holds all of the common shares of American Rental. To meet REIT
qualification requirements, 10% cumulative preferred shares with an
aggregate par value of approximately $200,000 will be issued to employees
of American Management and IGP Group.
(3) For owners of remaining interests in Maryland Cable, El Monte, and Escorial
Builders, see footnotes 11, 4, and 3 of "Organizational Charts--IGC Prior
to the Restructuring."
(4) ACPT indirectly, through American Land and IGP Group, owns 100% of IGP. The
Class A interest represents all of the interests in IGP other than the
Class B interest, which represents all of IGP's rights to income, gains,
and losses associated with land in Puerto Rico held by LDA that is
currently designated for development as saleable property.
(5) See footnotes 9 and 6 "Organizational Charts--IGC Prior to Restructuring"
for liquidation percentage interests in the U.S. and Puerto Rico Apartment
Partnerships.
(6) ACPT subsidiary created in connection with the Restructuring.
12
<PAGE>
IGC FOLLOWING THE RESTRUCTURING
The following chart depicts the organizational structure of IGC and its
subsidiaries immediately following the Restructuring. St. Charles Operating Co.
LLC will continue to own the Wetlands Properties, including the Towne Center
South land, and IGC will directly hold the Westbury land.
[FLOW CHART APPEARS HERE]
NOTES:
- ------
(1) Includes 52% Wilson Family ownership interest, of which 29.75% is
attributable to IBC and 11.32% to Wilson Securities Corporation.
(2) Remaining 99.99% interest owned by IBC.
(3) Remaining 99.98% interest owned by IBC.
(4) Remaining 1% interest owned by IBC.
(5) Remaining 50% interest owned by JCP Realty, Inc., Simon DeBartolo, and
Montgomery Ward & Co., unrelated third parties.
(6) Held for the benefit of IGC Unitholders, IGC will exercise no management
control over the CWT Trust, CWT, or IWT.
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SUMMARY RISK FACTORS.
Restructuring Risks.
. Absence of dissenters' appraisal rights; all IGC Unitholders will be bound
by the vote of the holders of a majority of the outstanding IGC Units and a
majority of the votes cast by IGC Unitholders not affiliated with the Wilson
Family.
. Members of the Wilson Family will be able to exert substantial control over
votes on matters affecting ACPT through their control of certain of the
Shareholders and the Wilson Family beneficially owns a majority of the IGC
Units. ACPT is subject to various conflicts of interest arising out of its
relationships with the Wilson Family and their affiliates including land
sales, property management services, office leases and administrative
services. Certain actions or decisions by these parties may have an adverse
effect on the interests of Shareholders.
. There is no guarantee that a public market for Common Shares will develop or
be sustained after the Distribution.
. The aggregate prices at which the Common Shares and IGC Units trade after
the Distribution may be lower than the prices at which the IGC Units traded
before the Distribution. In addition, it is likely that the Common Shares
will trade at a price substantially lower than the $21.55 net asset value
per share, as of March 31, 1998, determined by management based on
appraisals of land assets and valuations of interests in apartment
properties, management contracts and other assets.
. The transferability and ownership of ACPT Common Shares will be restricted
insofar as no Shareholder (other than certain current IGC Unitholders) may
own more than 2% of the outstanding Common Shares.
. Other provisions in ACPT's organizational documents may have the effect of
discouraging a change in control.
. ACPT is dependent on the efforts of its executive officers, and the loss of
their services could have an adverse effect on the operations of ACPT.
. Increases in market interest rates may lead prospective purchasers of the
Common Shares to disinvest in ACPT in favor of higher yielding investments.
Such disinvestment may adversely affect the market price of Common Shares.
. The Restructuring is subject to obtaining the approvals of certain
government entities, including HUD, certain IGC lenders, and a majority of
limited partners in four of the U.S. Apartment Partnerships.
. If in respect of claims by IGC creditors, it were to be determined that the
Distribution rendered IGC insolvent or otherwise constituted a fraudulent
transfer or conveyance, IGC Unitholders who receive the Distribution could
be required to return the Common Shares (or equivalent amounts) to IGC or
its creditors.
Real Estate Financing Risks.
. The business of ACPT will be subject to certain real estate financing risks,
including rising interest rates, debt financing risks, and risks associated
with financing new developments through construction loans.
Real Estate Investment Risks.
. The business of ACPT will be subject to certain real estate investment
risks, including operating risks associated with real estate, development
risks, such as zoning approvals, the potential application of federal and
state environmental laws and federal laws relating to disabled persons, and
changes in tax laws and building safety regulations, and competitive risks
from other entities.
. ACPT's U.S. and Puerto Rico apartment properties, and its development of
future projects, could be adversely affected by changes in government
regulations that restrict subsidy programs for new construction of low and
moderate income housing by developers such as ACPT.
14
<PAGE>
. ACPT may not be able to obtain insurance coverage with respect to certain
perils, such as hurricanes, wars, and earthquakes. Should an uninsured loss
arise, ACPT could lose both its capital invested in a property, as well as
anticipated future revenue.
. Risks associated with illiquidity of real estate, and risks associated with
the acquisition, development and construction may adversely affect ACPT's
profitability.
Tax Related Risks.
. IGC has calculated that approximately $6.1 million in gain will be
recognized as a result of the transfer of IGC's interest in the U.S.
Apartment Partnerships to American Housing and on the transfer of the Class
A interest in IGP to IGP Group. IGC has determined that this gain is
attributable to appreciation in the assets contributed by IBC upon the
formation of IGC and therefore all of such gain will be allocated solely to
IBC. If IGC's calculation or allocation of such gain is successfully
challenged by the IRS, a portion of such gain may instead be allocated to
Unitholders other than IBC.
. In connection with certain transfers made to preserve IGC's partnership tax
status, Shareholders may take a lower tax basis in the Common Shares than if
such transfer had not taken place.
. If ACPT's subsidiary American Rental fails to qualify as a REIT in any
taxable year, it will be taxed as a corporation and therefore subject to
federal income tax at regular corporate rates (the current maximum rate is
35%) on its taxable income.
. If IGP Group fails to qualify as a special partnership and instead is
treated as a corporation for Puerto Rico income tax purposes it would be
subject to Puerto Rico income tax on its income (at a 29% rate), and ACPT
and the Shareholders would not be allowed a deduction or credit for taxes
paid with respect to Puerto Rico source income of IGP Group.
. If ACPT is deemed engaged in a trade or business in Puerto Rico it will be
subject to Puerto Rico tax on its income from Puerto Rico source income
effectively connected with its Puerto Rico trade or business.
. If ACPT were to be classified as an association taxable as a corporation for
any year, ACPT would be taxable on its profits at the applicable corporate
rate (the current maximum rate is 35%), distributions to Shareholders
generally would be taxable as dividends and non-corporate Shareholders would
not be eligible for foreign tax deductions or credits with respect to Puerto
Rico taxes paid by ACPT.
. 90% of IGC's gross income must constitute "qualifying income". To preserve
IGC's status as a partnership for tax purposes, IGC intends to take steps to
ensure that it will meet the "90% qualifying income" test for 1998. Based on
unaudited results, IGC management believes that IGC meets the "90%
qualifying income" test through June 30, 1998. However, if IGC were treated
as a corporation as of January 1, 1998, IGC would recognize gain (and the
Unitholders would recognize their share thereof) to the extent that IGC's
liabilities exceed the tax basis of its assets on such date, and the
Unitholders would recognize gain to the extent that money is deemed
distributed to a Unitholder in excess of the Unitholder's tax basis. In
addition, the Distribution would be taxable to IGC to the extent that the
fair market value of the Common Shares exceeds IGC's tax basis in such
Common Shares, and an amount equal to the fair market value of the
distributed Common Shares would be taxable to the Unitholders as a dividend
to the extent of IGC's "earnings and profits," the excess as a return of
capital to the extent of the Unitholders' tax basis in their IGC Units, and
lastly, as to any excess remaining, as gain from the sale or exchange of
property.
. If ACPT were to sell its interests in American Land, American Management,
American Rental or IGP Group, the proportionate share of gain or loss
recognized by the Shareholder could vary depending on whether the
Shareholder purchased the Common Shares from a person that originally
contributed property to IGC. In those circumstances, the trading market for
Common Shares could be adversely affected because Common Shares are not
fungible.
15
<PAGE>
. Because of the difference between the federal and Puerto Rico accounting and
entity classification rules, taxes paid by or on behalf of, ACPT may be
different than the foreign tax credit or deduction allowable to ACPT
Shareholders.
. The Taxpayer Relief Act of 1997 (Pub. L. 105-34) (the "1997 Act") made
significant changes to the Code, including changes relating to the treatment
of partnerships and REITs. It may be some time before the IRS issues
regulations or other formal guidance under the 1997 Act. Such regulations or
other formal guidance could interpret the relevant law in a manner contrary
to this discussion and the opinion of Counsel. Such interpretation could be
applied retroactively.
. Each Shareholder generally will be taxed on its share of ACPT's taxable
income, regardless of whether Shareholder distributions are made by ACPT. If
distributions are less than the Shareholder's share of ACPT's taxable
income, Shareholders will pay tax on income they did not receive. Although
ACPT's Declaration of Trust generally requires distribution of 45% of ACPT's
taxable income (less the amount of certain taxes paid by ACPT), there can be
no assurance that ACPT will always be in a position to make such
distributions, and if made, in a timely manner.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF IGMC.
The Board of Directors of IGMC, by unanimous vote, has approved the
Restructuring, believes that the terms of the Restructuring are in the best
interests of the IGC Unitholders, and recommends that IGC Unitholders vote for
approving the Restructuring. The Board of Directors of IGMC did not make any
determination regarding fairness of the Restructuring and there were no arms-
length negotiations regarding the terms of the Restructuring because the
Restructuring consists of internal transfers of assets and the spin-off to
limited partners, including IGC Unitholders, on a pro rata basis of certain IGC
assets and because once it was determined that IGC would continue to be listed
on the AMEX and PSE, no fairness determination was required under the Exchange
Act. With respect to ACPT's employee plans, consulting contracts and other
arrangements incidental to the Restructuring, management may have conflicts of
interest. However, such arrangements were approved by the Board of Directors of
IGMC, including directors who are not members of the Wilson Family or officers
or employees of IGC or ACPT or an entity affiliated with the Wilson Family.
The Board of Directors of IGMC and executive officers of IGC collectively
beneficially own 967,728 IGC Units (9.31% of the outstanding IGC Units), and
intend to vote their IGC Units in favor of the proposed Restructuring. However,
the Restructuring is contingent upon the management of IGC determining that IGC
will be classified as a partnership for federal tax purposes for 1998. See "The
Special Meeting--Recommendation of the Board of Directors of IGMC."
THE SPECIAL MEETING.
The special meeting IGC Unitholders will be held on August 31, 1998 at 10
a.m. (local time) at The Willard Intercontinental Hotel, Washington, D.C. The
close of business on August 10, 1998 has been established as the record date
for determining IGC Unitholders entitled to notice of, and to vote at, the
special meeting. On that date there were 10,311,785 issued and outstanding IGC
Units. No matters other than the Restructuring (except certain procedural
matters) may be discussed or voted upon at the special meeting. The presence,
in person or by proxy, of IGC Unitholders holding more than 50% of the total
number of outstanding IGC Units will constitute a quorum at the special
meeting. If you beneficially own IGC Units issued to a broker or other nominee
holder, you must instruct such broker or nominee holder how to vote the IGC
Units that you beneficially own. If you do not give such instructions, the
broker or other nominee holder will not vote your IGC Units. For the
Restructuring to take effect, it must be approved by a majority of the
outstanding IGC Units and by a majority of the IGC Units present and voting
that are not beneficially owned by the Wilson Family. The Wilson Family
beneficially owns 5,405,572 IGC Units comprising approximately 52% of the
outstanding Units.
16
<PAGE>
Proxyholders will vote the eligible IGC Units represented by valid proxies at
the special meeting in accordance with the directions given on the Proxy Card
concerning whether to approve the Restructuring. IF YOU SIGN AND RETURN A PROXY
CARD WITHOUT GIVING ANY DIRECTIONS ON HOW TO VOTE ON THE RESTRUCTURING, THE
PROXYHOLDER WILL VOTE YOUR IGC UNITS FOR THE APPROVAL OF THE RESTRUCTURING. You
may revoke your proxy at any time prior to the proxyholder's voting of the IGC
Units to which your proxy applies by: submitting a later dated Proxy Card,
attending the special meeting and delivering a written revocation of the proxy,
or delivering a written notice stating that you wish to revoke your proxy to
IGC, 222 Smallwood Village Drive, St. Charles, MD 20602 before the date of the
special meeting. See "The Special Meeting."
PRINCIPAL ADVANTAGES OF THE RESTRUCTURING.
Broader Market for Common Shares than for IGC Units.
Limited partnership interests which require holders to recognize trade or
business income and losses from partnership operations are generally not
regarded as attractive investments for institutions such as mutual funds and
pension funds. ACPT, as a holding company, will receive income principally in
the form of dividends and distributions from its subsidiaries, and its Common
Shares should be a more attractive investment for certain investors than IGC
Units even though ACPT is expected to be treated as a partnership for federal
income tax purposes. Enlarging the group of potential investors for ACPT Common
Shares should produce a more liquid market than currently exists for IGC Units.
However, there is no assurance that a trading market will develop or be
substantial.
No History of Wetlands Litigation.
IGC, which was convicted of federal Clean Water Act violations (which
conviction was reversed but has been remanded for a new trial), will retain the
four parcels of land that were involved in that litigation and the one
additional parcel that was the subject of a civil suit that was dismissed
without prejudice (collectively, the "Wetlands Properties"). None of the land
to be transferred to ACPT was so implicated and ACPT is not a party to such
proceedings. See "Legal Proceedings--IGC" and "IGC After the Restructuring--
Creditors Rights."
No Adverse Financial Effects from AFH, IWT, and CWT.
AFH has had operating losses and has capital needs and IWT and CWT have
capital needs that have had adverse effects upon IGC's operating results and
financial condition. These are expected to continue for the foreseeable future.
AFH will remain a subsidiary of IGC, and IWT and CWT will be held by the CWT
Trust for the benefit of IGC Unitholders. Thus, their financial results will
not affect ACPT. See "The Restructuring--Assets Retained by IGC." ACPT will
have no obligation to provide financial support to AFH, IWT or CWT. See "IGC
After the Restructuring--Description of IGC's Continuing Business."
Simplified Tax Reporting.
Because ACPT will derive income principally from dividends from corporations,
the items to be reported for federal tax purposes by ACPT Shareholders
generally will be limited to dividends and Puerto Rico taxes paid by ACPT with
respect to the income of IGP Group in Puerto Rico. Shareholders will not have
to report ordinary income or losses from trade or business activity as is
currently the case with IGC. See "Income Tax Considerations--Federal Income Tax
Considerations--Federal Income Tax Classification of ACPT."
Enhanced Financing Opportunities.
The removal of the adverse financial effects of AFH, IWT, and CWT and the
absence of involvement in the wetlands litigation should provide ACPT with
opportunities to obtain financing for its operations from banks
17
<PAGE>
and other lenders on terms that generally are more favorable than those
currently available to IGC. See "The Restructuring--Principal Advantages of
Restructuring." ACPT has not obtained any financing independent of IGC.
However, ACPT has engaged investment bankers to advise and assist in possible
financing activities to be commenced after the completion of the Restructuring.
Election of Trustees by Shareholders.
ACPT will be managed by its Board of Trustees, the members of which will be
elected by ACPT shareholders. ACPT also will hold annual meetings of
shareholders. See "Comparative Rights of IGC Unitholders and Shareholders."
See "The Restructuring--Principal Advantages of the Restructuring."
PRINCIPAL DISADVANTAGES OF THE RESTRUCTURING.
No Cash Distributions to IGC Unitholders.
Unless IGC ultimately prevails in the wetlands litigation, or the CWT Trust
sells assets and remits proceeds to IGC, the operations and assets remaining
with IGC after the Restructuring may not enable IGC to make quarterly
distributions to the IGC Unitholders. See "IGC After the Restructuring--
Description of IGC's Continuing Business." It is possible that IGC may
recognize taxable income without generating sufficient cash to enable IGC to
make a distribution to the IGC Unitholders in an amount at least equal to the
IGC Unitholders' tax liability arising from their share of IGC taxable income.
Tax Liabilities.
Gain will be recognized by IGC (and the Unitholders will take into account
their allocable share of such gain) on the transfer of IGC's interests in the
U.S. Apartment Partnerships to American Housing to the extent that the amount
of liabilities assumed (or deemed assumed) by American Housing exceeds the tax
basis of the property contributed to American Housing. IGC has calculated that
approximately $4.2 million in gain will be recognized as a result of the
transfer, based on certain estimates and assumptions by IGC, including IGC's
estimates of tax basis and the amount of liabilities at the time of the
transfer. See "Income Tax Considerations--Federal Income Tax Considerations--
Federal Income Tax Consequences of the Asset Transfers."
American Management and American Land will be treated as corporations for
federal and state tax purposes and will be subject to federal and state income
tax (including any applicable alternative minimum tax) on their taxable income
at regular corporate tax rates. Payment of such taxes may reduce the amounts
otherwise available for distribution to ACPT, or by ACPT to the Shareholders.
As a result of the Asset Transfers, Shareholders will not have a distributive
share of the various items of income, gain, loss, deduction or credit
attributable to the operating businesses conducted by partnerships. Instead,
distributions to ACPT from its subsidiaries American Management, American Land,
IGP Group and American Rental generally will be limited to dividend income (to
the extent of current and accumulated earnings and profits), and, in the
absence of earnings and profits, nontaxable return of capital (to the extent of
ACPT's tax basis in the stock of such corporation) or taxable capital gain
(after ACPT's tax basis has been reduced to zero). Distributions from American
Rental that are specifically designated as capital gain dividends are treated
as long term capital gains. Each Shareholder generally will include its
distributive share of ACPT's income in the Shareholder's taxable income. In the
event that American Rental elects to retain all or a portion of its net capital
gain and pay federal income tax on such undistributed amounts, each Shareholder
generally will include in income its distributive share of the undistributed
capital gains and will be deemed to have paid its distributive share of the
income tax paid by American Rental with respect to such undistributed capital
gains.
18
<PAGE>
Reduction of Required Distributions.
Under its Partnership Agreement, IGC is required to distribute annually to
IGC Unitholders, in cash and/or property, an amount equal to 55% of the net
taxable income of IGC allocated to IGC Unitholders. The terms of ACPT's
Declaration of Trust require ACPT to distribute annually to Shareholders, in
cash and/or property, an amount equal to 45% of the net taxable income of ACPT
allocated to Shareholders less the amount of taxes paid by ACPT in Puerto Rico
and other foreign countries and certain federal taxes paid by American Rental
with respect to undistributed capital gains.
As is the case with IGC, it is possible that ACPT may recognize taxable
income without generating sufficient cash to enable ACPT to make a distribution
to Shareholders in an amount at least equal to the Shareholders' tax liability
arising from their share of ACPT taxable income.
Antitakeover Effects.
The provisions of ACPT's Declaration of Trust on classification of the Board
of Trustees, restrictions on the ownership of Common Shares, the ability to
issue preferred stock, and certain control share acquisition and business
combination statutes applicable to ACPT could have the effect of delaying,
deferring or preventing a transaction or a change in control of ACPT that might
involve a premium price for holders of Common Shares or otherwise be in their
best interest.
Restrictions on Accumulation of Common Shares.
In order to preserve American Rental's qualification as a REIT, ACPT's
Declaration of Trust and Bylaws provide that a person (other than certain
existing IGC Unitholders) may not directly or indirectly own more than 2% of
the outstanding Common Shares. See "Income Tax Considerations--Federal Income
Tax Classification of American Rental."
See "The Restructuring--Principal Disadvantages of the Restructuring."
MECHANICS OF THE RESTRUCTURING.
The Asset Transfers.
ACPT acts as a self-managed holding company that will own all of the
outstanding equity interests in American Land, American Management, and IGP
Group and all of the common stock of American Rental. Through the Asset
Transfers, IGC will transfer its principal real estate operations and assets to
ACPT and these subsidiary entities. American Rental, through American Housing,
will acquire IGC's partnership interests in United States investment apartment
properties and its land in the United States presently intended for development
as apartment properties. IGC intends to defer the transfer of its general
partnership interest in nine apartment partnerships until after the
Distribution in order to obtain limited partner consents or to avoid triggering
a tax termination under the Code. IGC intends to obtain such limited partner
consent as soon as practicable after the Distribution. See "Transactions With
Related Parties--Staggered Transfer of Partnership Interests to American
Housing." American Rental is expected to be taxed as a REIT. American
Management holds the United States property management services operations
formerly conducted directly by IGC. American Management will be taxed as a
corporation. American Land will acquire IGC's principal United States community
development assets and operations, IGC's interest in a partnership that is
entitled to receive certain fees resulting from the 1988 sale of a cable
television company, and the Class B IGP Interest that represents IGP's rights
to income, gains and losses associated with land in Puerto Rico held by LDA and
designated for development as saleable property. American Land is a Maryland
corporation and will be taxed as a corporation. IGP Group will acquire IGC's
remaining interests in IGP, which will hold its partnership interests in Puerto
Rico
19
<PAGE>
investment apartment properties, and in Puerto Rico management services and
rights to income, gains and losses associated with land in Puerto Rico held by
LDA for development as rental properties. See "The Restructuring--Asset
Transfers."
IGP Group intends to qualify as a Puerto Rico pass-through entity that will
be taxed as a corporation for U.S. tax purposes and will not be taxable at the
entity level for Puerto Rico income tax purposes. The general partner interest
in IGP currently held by James J. Wilson will be transferred to a subsidiary of
ACPT. As a result, ACPT will own indirectly 100% of the partnership interests
in IGP.
See "The Restructuring--The Asset Transfers," "Business and Properties of
ACPT," and "Income Tax Considerations--Federal Income Tax Considerations--
Federal Income Tax Consequences of the Asset Transfers."
The Distribution.
Following the Asset Transfers, ACPT will issue to IGC sufficient Common
Shares to enable IGC to make the Distribution. In the Distribution, IGC will
distribute all Common Shares held by it to the IGC Unitholders and its general
partners--IGMC and IBC--pro rata in accordance with their percentage
partnership interests in IGC. Each IGC Unitholder will receive one Common Share
for every two IGC Units held. The aggregate of approximately 5,250,000 Common
Shares distributed to IGC Unitholders will equal 99% of the Common Shares
outstanding immediately following the Distribution, corresponding to the IGC
Unitholders' aggregate 99% partnership interest in IGC. Common Shares
representing the remaining 1% of such Common Shares will be distributed to IGMC
and IBC in accordance with their respective 1/3% and 2/3% partnership interests
in IGC, with IGMC receiving approximately 17,500 Common Shares and IBC
receiving approximately 34,500 Common Shares. See "The Restructuring--The
Distribution."
No certificates or scrip representing fractional Units will be issued to IGC
Unitholders as part of the Distribution. The Registrar and Transfer Company
(the "Distribution Agent") will aggregate fractional Units into whole Units and
sell them in the open market at then prevailing prices on behalf of IGC
Unitholders who otherwise would be entitled to receive fractional Unit
interests, and such persons will receive a check in payment for the amount of
their allocable share of the total sale proceeds. See "Income Tax
Considerations--Federal Income Tax Considerations--Federal Income Tax
Consequences of the Distribution." Such sales are expected to be made as soon
as practicable after the Distribution of Common Shares to IGC Unitholders. ACPT
will bear the cost of any commissions incurred in connection with such sales.
Assets Retained by IGC.
After the Restructuring, IGC will continue to own certain assets that in
management's view do not fit ACPT's business plan. These include the Wetlands
Properties, certain parcels of land in Pomfret, Maryland, the Westbury
community in St. Mary's County, Maryland ("Westbury"), certain single family
home lots in the Dorchester neighborhood in St. Charles, a 50% interest in
Brandywine Investment Associates L.P., which owns land in Brandywine, Maryland,
the LDA Note, all of the shares of AFH, as well as fractional interests in
Chastleton Apartment Associates, L.P. ("Chastleton"), and Coachman's L.P., and
beneficial interest in the CWT Trust (collectively, the "Retained Assets"). As
part of the Asset Transfers, IGC conditionally has agreed to transfer to
American Land 14 acres of land in St. Charles that currently is zoned for
commercial use (the "Commercial Parcel") if and when IGC settles the wetlands
litigation on terms approved by the Board of Directors of IGMC, provided that
IGC shall have received confirmation that the transfer of the Commercial Parcel
(and resulting decrease in the value of IGC's assets) will not cause the IGC
Units to be delisted from AMEX or the PSE. The Commercial Parcel has an
appraised gross retail value as of December 31, 1996 of $4,214,000. If IGC is
unable to settle the wetlands litigation on satisfactory terms or IGC does not
receive confirmation of the continued listing of IGC Units, IGC also will
retain the Commercial Parcel. See "The
20
<PAGE>
Restructuring--Assets Retained by IGC." As a result of the wetlands conviction,
the Wetlands Properties were encumbered by an obligation to impose a
conservation easement that would prohibit development. The easement was never
recorded and the wetlands conviction was reversed. However, the matter has been
remanded for a new trial and as a practical matter, the Wetlands Properties
will remain undevelopable until the wetlands litigation is finally resolved.
See "IGC After the Restructuring--Description of IGC's Continuing Business" and
"Legal Proceedings."
APPRAISALS.
Properties Retained by IGC.
Following the Restructuring, IGC intends to retain certain properties. IGC,
through St. Charles Associates Limited Partnership ("SCA") will retain an
interest in Brandywine Village, a 277-acre tract of land in Brandywine,
Maryland having an appraised present "as is" market value of $8,885,000 as of
June 9, 1997. IGC will continue to own Section S-4 of the Southlake at
Montclair Subdivision that consists of 77 townhome lots in Dumfries, Virginia
having an aggregate appraised present "as is" market value of $620,000 as of
May 12, 1997; Westbury, Phase II Section I that comprises 26.992 acres of land
in Lexington Park, Maryland having an appraised present "as is" market value of
$348,813 as of May 20, 1997 based on a proposed 51 lot subdivision; 812.2 acres
of land in Pomfret, Maryland having an appraised present "as is" market value
of $3,250,000 as of December 31, 1996; and 26 single family home lots in the
Dorchester neighborhood having a gross retail value of $1,296,000 as of
December 31, 1996. See "Appraisals--Properties Retained by IGC."
Properties Transferred to ACPT.
ACPT, through IGP Group and its indirect ownership in LDA, will acquire
approximately 431 acres of land currently owned by LDA in the Sabana Llana and
San Anton Wards of the municipalities of San Juan and Carolina, Puerto Rico
having an appraised present "as is" market value of $35,900,000 as of December
1, 1996; 542.92 acres of land in Canovanas, Puerto Rico having an appraised
present "as is" market value of $6,100,000 as of June 30, 1997. Through
American Land ACPT also will acquire remnant parcels of land, Wooded Glen and
Piney Reach, in the St. Charles PUD and certain surrounding environs currently
indirectly owned by IGC having an appraised present "as is" market value of
$40,440,000; 1,287 acres of land in St. Charles, Maryland at Fairway Village
having an appraised present "as is" market value of $19,263,000 as of May 25,
1997; and 38 acres of land in St. Charles, Maryland indirectly owned by IGC
having an appraised present "as is" market value of $3,960,000 as of October
31, 1997. See "Appraisals--Properties Transferred to ACPT."
The Commercial Parcel.
As part of the Asset Transfers, IGC conditionally has agreed to transfer to
American Land the Commercial Parcel if and when IGC settles the wetlands
litigation on terms approved by the Board of Directors of IGMC, provided that
IGC shall have received confirmation that the transfer of the Commercial Parcel
(and resulting decrease in the value of IGC's assets) will not cause the IGC
Units to be delisted from AMEX or the PSE. The Commercial Parcel has an
appraised gross retail value as of December 31, 1996 of $4,214,000. See
"Appraisals--The Commercial Parcel." If IGC is unable to settle the wetlands
litigation on satisfactory terms or IGC does not receive confirmation of the
continued listing of IGC Units, IGC also will retain the Commercial Parcel.
BACKGROUND OF THE RESTRUCTURING; CONSIDERATION OF ALTERNATIVES.
IGC management began examining various restructuring possibilities during the
Fall of 1996, and, in consultation with IGC legal counsel and tax advisors,
identified the REIT as a possible investment vehicle. In December 1996, IGC
management announced that it had determined to implement a plan placing IGC's
multifamily housing assets into a publicly-traded REIT and disposing of land
development assets to Wilson Family entities. Tax considerations required
dividing IGC's multifamily housing assets between separate U.S.
21
<PAGE>
and Puerto Rico REITs. During the first quarter of 1997, a special committee of
the IGMC Board of Directors expressed concern that two REITs would not have
sufficient assets and income to create a strong trading market for their
securities.
In April 1997, IGC management announced a modified plan to convert IGC into
an entity similar to the current proposal for ACPT. The proposed entity would
retain the right to receive shares of CWT and/or IWT as soon as either or both
contracted to begin a solid waste disposal facility and an option to purchase
the Wetlands Properties at book value if the wetlands litigation were favorably
resolved. The plan also contemplated making an offer to the limited partners in
the Apartment Partnerships to exchange their partnership interests for
interests in a U.S. or Puerto Rico partnership that would hold the apartment
properties (the "Exchange Offer").
IGC retained Robert A. Stanger & Co. ("Stanger") on May 8, 1997 to assist in
refining the structure and providing opinions regarding the fairness of the
Exchange Offer and asset transfers. On Stanger's recommendation, IGC management
considered IGC continuing as a separate publicly traded partnership with AFH,
IWT, CWT and the Wetlands Properties, while creating and distributing to its
Unitholders shares of ACPT.
On November 14, 1997, IGC filed with the Commission preliminary proxy
materials relating to the Restructuring (the "November Filing"). On December
24, 1997 IGC received a letter from the staff of the Commission's Division of
Corporation Finance expressing the view that the Restructuring would constitute
a "going private" transaction unless assurances could be obtained that IGC
Units would remain listed on AMEX and PSE following the Restructuring.
During January 1998, a syndicator of limited partnership interests in 10 of
the 22 U.S. and Puerto Rico Apartment Partnerships opined to IGC that the
Exchange Offer likely would not be attractive to a majority of the holders of
limited partnership interests in these partnerships, and IGC management
discontinued plans for the Exchange Offer.
Also in January 1998, Jorge Colon-Nevares resigned as a director of IGMC and
was replaced by Thomas Shafer. The IGMC Board established a new special
committee comprised of Messrs. Blakeman, Cowan, and Shafer to reevaluate the
terms of the Restructuring.
IGC management proposed a reallocation of certain assets between IGC and ACPT
to enhance the prospects for continued listing of IGC Units on the AMEX and PSE
and to provide greater capital resources for the waste technology business. The
committee examined the management's projected pro forma earnings and cash flows
for ACPT and IGC following the Distribution. Stanger also reviewed the
projected pro forma financial statements. The committee obtained a commitment
of IBC to advance funds to IGC, if needed, to pay wetlands defense costs.
On March 31, 1998 AMEX advised IGC that based on its review of the projected
pro forma financial statements of IGC, IGC management should expect that the
IGC Units would remain listed following the Distribution. See "The
Restructuring--Background of the Restructuring; Consideration of Alternatives."
The Board adopted resolutions formally approving the Restructuring and
recommending that IGC Unitholders approve the Restructuring on July 7, 1998.
BENEFITS TO INSIDERS.
Upon completion of the Restructuring, the Board of Trustees of ACPT will
consist of six persons--J. Michael Wilson, Edwin L. Kelly, Francisco Arrivi
Cros, Donald G. Blakeman, Thomas Shafer and Thomas B. Wilson--all of whom
currently are directors of IGMC. However, such persons, except Mr. Blakeman,
will resign from their positions at IGMC prior to completion of the
Restructuring. See "Management--Trustees and Executive Officers." Immediately
following the Distribution the Board of Directors of IGMC will consist of
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<PAGE>
James J. Wilson, Mark Augenblick, Mr. Blakeman and Thomas Shafer. Mr. Blakeman
intends to resign as a trustee of ACPT and director of IGMC at such time as
another independent trustee and director is recruited. See "IGC After the
Restructuring--Management of IGC."
In addition, J. Michael Wilson, Mr. Kelly, Mr. Arrivi, Paul Resnik and
Eduardo Cruz Ocasio, who currently are officers of IGC, will serve as executive
officers of ACPT following the Restructuring, but will resign from their
executive positions at IGC prior to completion of the Restructuring. See
"Management--Trustees and Executive Officers." J. Michael Wilson will remain on
the payroll of IBC but ACPT will reimburse IBC for one-half of his annual
salary, up to $90,000. See "Management--Executive Compensation" and
"Transactions with Related Parties--Payments to IBC for Services Provided by J.
Michael Wilson." Messrs. Kelly, Arrivi and Resnik will enter into employment
agreements with American Management to become effective on the date of
Distribution that will provide for annual salaries of $275,000, $275,000 and
$200,000 respectively. Such agreements also will provide for severance benefits
equal to up to 24 months base salary under certain conditions. The compensation
payable under these agreements does not reflect any increase from compensation
currently paid by IGC. See "Management--Employment Agreements." Mr. Cruz Ocasio
will be paid an annual salary of $115,000.
Trustees and officers of ACPT will be entitled to participate in Common Share
incentive plans to be adopted by ACPT to provide incentive compensation to
Trustees, officers and key employees. See "Management--Share Incentive Plans."
In addition, directors, executives and other employees of IGC who have been
awarded IGC Unit Options and IGC Unit Appreciation Rights prior to the
Distribution will receive corresponding ACPT Options or Rights in connection
with the Restructuring. See "Management--Treatment of IGC Options and Unit
Appreciation Rights."
James J. Wilson, who will continue as chief executive officer of IGC, will
serve as a consultant to ACPT under a 10-year consulting agreement providing
for payments of $500,000 per year during the first two years and $200,000 per
year for the remaining eight years. See "Transactions with Related Parties."
IGC will receive no proceeds in connection with the Restructuring and,
consequently, IGMC directors and IGC executive officers and employees will
receive no proceeds in connection with the transactions.
THE PRIVATE OFFERING.
ACPT has engaged investment bankers to advise and assist in possible
financing activities to be commenced after the completion of the Restructuring.
In connection with the Restructuring, subject to market conditions, ACPT will
seek to raise up to $35 million in additional equity capital through the
Private Offering of Preferred Shares. Proceeds from the Private Offering would
be used to pay down existing bank debt and for working capital. The terms of
the preferred shares will be negotiated with purchasers, but they may include
rights to preferred distributions, cumulative distributions, and/or liquidation
preferences. The preferred shares also may be convertible into Common Shares at
a negotiated conversion ratio. The Private Offering, if completed, would result
in dilution of the percentage interest of all ACPT shareholders including the
Wilson Family, whose percentage ownership would likely be reduced below 40%.
Regardless of the outcome of the Private Offering, James J. Wilson and J.
Michael Wilson have advised ACPT that the Wilson Family intends to take such
other actions as may be necessary to reduce its percentage interest to below
40% in order to permit American Rental to qualify as a REIT. See "Income Tax
Considerations--Federal Income Tax Considerations--Federal Income Tax
Classification of American Rental--Share Ownership, Reporting" and "The
Restructuring--The Private Offering."
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<PAGE>
NO DISSENTERS' APPRAISAL RIGHTS.
Under the Delaware Revised Uniform Limited Partnership Act (the "Delaware
Act") and the Partnership Agreement of IGC, IGC Unitholders who object to the
Restructuring will have no right to seek a judicial appraisal of the fair value
of their IGC Units and to compel IGC to pay such amount in cash in exchange for
their IGC Units as a consequence of the consummation of the Restructuring, nor
will such rights be voluntarily accorded to IGC Unitholders by IGC. Thus,
approval of the Restructuring by the requisite vote of IGC Unitholders will
bind all IGC Unitholders, including those who object. See "The Restructuring--
No Dissenters' Appraisal Rights."
CONFLICTS OF INTEREST.
Following the Restructuring the Wilson Family will own a majority of the
Common Shares of ACPT and will continue to own a majority of the IGC Units.
Accordingly, the Wilson Family will be able to exert substantial control over
votes on matters affecting ACPT and IGC. Following the Restructuring, ACPT and
IGC will compete for certain land sales to the extent of the Retained Assets,
and the Wilson Family's interests in ACPT and IGC may pose potential conflicts.
See "Risk Factors--Control of ACPT; Conflicts of Interest" and "Ownership of
Common Shares."
In addition, ACPT has entered into transactions with certain Shareholders and
members of Management. See "Transactions with Related Parties."
TAX CONSEQUENCES OF THE RESTRUCTURING FOR U.S. UNITHOLDERS AND SHAREHOLDERS.
IGC will recognize approximately $6.1 million in gain for federal tax
purposes as a result of the Asset Transfers, all of which will be allocated to
IBC. A Shareholder will not recognize gain or loss upon receipt of Common
Shares in the Distribution. A Shareholder's initial tax basis in his Common
Shares generally will be equal to the lesser of IGC's tax basis in those Common
Shares or the Shareholder's adjusted tax basis in his or her IGC Units
immediately before the Distribution. Each Shareholder's adjusted tax basis in
his or her IGC Units will be reduced by an amount equal to his or her initial
basis in the Common Shares. IGC will not recognize gain or loss upon the
Distribution. A Shareholder who receives cash in lieu of fractional Common
Shares will recognize gain. The amount of gain recognized will not exceed the
amount of cash received. ACPT will provide Shareholders with information
indicating the amount of any gain which must be recognized on the receipt of
cash in lieu of fractional Common Shares interests. See "Income Tax
Considerations--Federal Income Tax Consequences of the Distribution." Following
the Distribution, each Shareholder, in general, will take into account his
allocable share of ACPT's taxable income or loss in computing his individual
federal income tax liability. See "Risk Factors--Tax Related Risks" and "Income
Tax Considerations."
TAX CONSEQUENCES OF THE RESTRUCTURING FOR PUERTO RICO UNITHOLDERS AND
SHAREHOLDERS.
Puerto Rico Shareholders will recognize income upon the receipt of the Common
Shares and cash distributed in lieu of fractional Shares distributed by IGC.
The receipt of the Common Shares and cash will be taxable at ordinary income
tax rates to the extent of earnings and profits of IGC or as non-taxable
returns of capital or as gain from the sale or exchange of property, depending
upon the circumstances of the distribution. See "Income Tax Considerations--
Certain Puerto Rico Income Tax Consequences."
COMPARISON OF OPERATIONS OF ACPT AND IGC.
Following completion of the Restructuring, it is expected that the operations
of ACPT will be substantially similar to the real estate operations currently
conducted by IGC. ACPT will succeed to the principal rental and land
development assets held by IGC and its subsidiaries in the United States and
Puerto Rico as well as the property management operations conducted by IGC's
subsidiary American Management in the United States and
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<PAGE>
by IGP in Puerto Rico. See "The Restructuring--The Asset Transfers" and
"Business and Properties of ACPT." Management believes that ACPT's business
objectives will remain the same as those pursued by IGC--to maximize
Shareholder value by investing, holding and developing assets that will
generate cash for distribution to Shareholders. ACPT's policy will be to
acquire or develop assets in areas that utilize the expertise of management,
primarily community development and commercial and residential rental
properties. See "Business and Properties of ACPT--Policies with Respect to
Certain Activities."
Immediately following completion of the Restructuring, the Trustees and
principal executive officers of ACPT will be substantially the same as the
current directors of IGMC and officers of IGC, respectively, except that James
J. Wilson, the founder and Chief Executive Officer of IGC, will not be a
Trustee or officer of ACPT. See "Risk Factors--Dependence on Key Personnel;
Withdrawal of James J. Wilson from Management." However, in order to provide
continuity of management, Mr. Wilson will serve as a consultant to ACPT under a
ten year consulting agreement. See "Transactions with Related Parties--
Consulting Agreement." Because the Trustees of ACPT will be elected by the
Shareholders, management of ACPT may change if the initial Trustees are not re-
elected. See "Management--Board of Trustees." As is the case with IGC,
Shareholders will not be entitled to obtain a list of program investors.
COMPARATIVE RIGHTS OF IGC UNITHOLDERS AND SHAREHOLDERS.
As a result of the Restructuring, IGC Unitholders will receive Common Shares
of ACPT and will continue to hold IGC Units. ACPT is a Maryland investment
trust, and IGC is a Delaware limited partnership. The following table compares
certain rights of IGC Unitholders currently to rights of holders of Common
Shares if the Restructuring occurs. See "Comparative Rights of IGC Unitholders
and Shareholders." When used in this table, "majority vote" means a majority of
the IGC Units or Common Shares outstanding.
<TABLE>
<CAPTION>
IGC UNITHOLDERS SHAREHOLDERS
------------------------------------------------- -------------------------------------
<S> <C> <C>
RIGHT TO ELECT No right to elect directors of IGMC. Shareholders vote to elect Trustees;
MANAGEMENT IGC Unitholder approval by majority vote classified Board of Trustees with
is required to permit the voluntary staggered three-year terms.
withdrawal of, or admission of a general partner.
RIGHT TO REMOVE The IGC Unitholders may remove any Shareholders may remove members
MANAGEMENT general partner, with or without cause, of the Board of Trustees for cause by
by majority vote. majority vote and for any reason by
two-thirds vote.
REQUIRED MINIMUM IGC is required to distribute in cash or ACPT is required to distribute in
DISTRIBUTION property 55% of the net taxable income cash or property an amount equal to
allocated to IGC Unitholders. 45% of net taxable income allocated
to Shareholders less the amount of
certain taxes paid by ACPT.
OWNERSHIP LIMITATIONS There is no limitation on the number of No Shareholder (except certain
IGC Units that any Unitholder may own. existing IGC Unitholders) may own
more than 2% of the outstanding
Common Shares.
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
IGC UNITHOLDERS SHAREHOLDERS
---------------------------------------------- -----------------------------------------
<S> <C> <C>
GENERAL VOTING RIGHTS IGC Unitholder approval by majority Shareholder approval by majority
REGARDING GOVERNANCE vote is required for (i) sale of all or vote is required for (i) a sale of all or
substantially all of the assets, substantially all of ACPT's assets,
(ii) merger or consolidation, and (ii) merger or consolidation of ACPT,
(iii) certain amendments to the Partnership and (iii) removal of a Trustee for cause.
Agreement, including certain issuances of The Board of Trustees has exclusive
additional limited partnership interests. IGMC authority to increase or decrease the
has exclusive authority to issue IGC Units aggregate number of Common Shares
without limitation as to amount. that ACPT has authority to issue.
SUPERMAJORITY VOTING Unanimous vote of IGC Unitholders is A two-thirds vote of Shareholders is
RIGHTS required for certain actions, including required to (i) remove Trustees other
actions that would cause loss of limited than for cause, (ii) amend the
liability, treatment of IGC as a Declaration of Trust (including
corporation for tax purposes, or, except required minimum distribution
in the case of merger or dissolution, provisions), and (iii) dissolve ACPT.
delisting of IGC Units from any
national securities exchange. Approval
by two-thirds vote of IGC Unitholders
(excluding general partners and their
affiliates) is required for reduction of
minimum amount of cash flow required
to be distributed to IGC Unitholders.
DISSOLUTION Requires consent of IGC Unitholders by Requires approval of Shareholders by
majority vote, except for involuntary two-thirds vote.
withdrawal of a general partner.
LIQUIDATION RIGHTS IGC Unitholders share ratably in Shareholders share ratably in any
accordance with percentage interests in assets remaining after satisfaction of
any assets remaining after satisfaction obligations to creditors and any
of obligations to creditors and any liquidation preferences of Preferred
liquidation preferences of preferred Shares.
Units.
</TABLE>
These substantive and procedural differences affect the rights of IGC
Unitholders and holders of Common Shares. Specifically, ACPT's policies with
respect to investments, financings, affiliate transactions, and certain other
activities may be amended or revised from time to time at the discretion of the
Board of Trustees.
26
<PAGE>
SUMMARY COMBINED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
The following table presents summary combined historical financial data
derived from American Community Portfolio Properties' ("ACPP" as defined in
Note 1 to the Combined Historical Financial Statements) for the quarter ended
March 31, 1998 and the three most recent years ended December 31, 1997 and
summary pro forma condensed combined financial information derived from ACPT's
unaudited Pro Forma Combined Financial Data. ACPP's Historical Combined
Financial Statements present the financial position, results of operations and
cash flows of ACPP as if it were a separate company operating for all the
periods presented. Because ACPT has no historical operations, for purposes of
the audited combined historical financial statements the assets, liabilities
and operations that will be transferred to ACPT in the Restructuring are
referred to as "ACPP." The pro forma financial data set forth below may not
necessarily be indicative of the results that would have been achieved had the
transfer and distribution transactions been consummated as of the date
indicated or that may be achieved in the future. The net asset values set forth
below are management's estimate of the fair value of ACPP's net assets to its
beneficial owners. The information in the table should be read in conjunction
with "Selected Combined Historical Financial Data," "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Pro Forma
Combined Financial Data" and the Combined Historical Financial Statements of
American Community Portfolio Properties included elsewhere herein. ACPP's
fiscal year ends on December 31.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------------- --------------------------------------
PRO FORMA(1) HISTORICAL(2) PRO FORMA(1) HISTORICAL(2)
------------ ------------- ------------ -------------------------
1998 1998 1997 1997 1996 1995
------------ ------------- ------------ ------- ------- -------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE, LOT, ACRE AND UNIT
AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues................ $9,788 $9,788 $28,129 $28,129 $43,634 $27,184
Expenses................ 8,273 8,263 25,795 25,665 26,139 21,500
Income taxes............ 825 283 1,377 470 3,424 1,369
Minority interest....... (241) (241) (600) (600) (444) (511)
Net income(3)........... 449 1,001 357 1,394 12,695 3,804
Pro forma basic earnings
per share(4)........... 0.09 0.19 0.07 0.27 2.45 0.73
Pro forma weighted
average shares
outstanding(4)......... 5,218 5,218 5,196 5,196 5,180 5,179
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
AS OF MARCH 31, 1998 1997
-------------------------- ------------------
PRO FORMA(1) HISTORICAL(2) HISTORICAL(2)
------------ ------------- ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Total assets...................... $111,283 $111,283 $115,122
Recourse debt..................... 35,191 35,191 40,926
Total liabilities................. 95,065 93,431 99,106
Capital........................... 16,218 17,852 16,016
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
HISTORICAL(2) HISTORICAL(2)
------------------ ---------------------------
1998 1997 1996 1995
------------------ ------- -------- --------
<S> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Cash flow provided by (used
in)--
Operating activities......... $ 8,884 $13,400 $ 26,454 $ 9,462
Investing activities......... (3,908) (8,372) (11,084) (11,431)
Financing activities......... (4,977) (5,044) (16,609) 4,273
Cash available for
distribution, additional
investment or debt repayment
(5)........................... (836) 5,450 3,421 3,071
Cash available for
distribution, additional
investment or debt repayment
per share (4,5)............... (0.16) 1.04 0.66 0.59
</TABLE>
<TABLE>
<CAPTION>
AS OF
-----------------------------------
DECEMBER 31,
MARCH 31, -----------------------
1998 1997 1996
----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Net asset value ("NAV") (6)................. $112,455 $110,870 $108,485
Pro forma NAV per share (4,6)............... 21.55 21.25 20.94
Pro forma shares outstanding (4,6).......... 5,218 5,218 5,180
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED DECEMBER 31,
ENDED MARCH 31, -----------------------------
1998 1997 1996 1995
--------------- ------- ------- -------
<S> <C> <C> <C> <C>
Other Operating Data (7):
Rental apartment units
managed.................... 8,139 8,139 8,139 8,085
Rental apartment units
owned...................... 5,291 5,291 5,291 6,155
Lots sold for residential
units...................... 200 231 406 113
Residential lots transferred
to joint venture........... -- 118 98 --
Residential lots transferred
to company's rental
property operations........ -- -- -- 54
Commercial and business park
acres sold................. 31 17 5(9) 20(9)
Undeveloped acres sold...... -- 381(8) -- 2
</TABLE>
- --------
(1) Reflects the consummation of the Distribution. See "ACPT Pro Forma Combined
Financial Data."
(2) Reflects the historical financial data for the operations, assets and
liabilities proposed to be transferred from IGC to ACPT and subsidiaries,
referred to as American Community Portfolio Properties.
(3) The net income for 1996 includes a $932,000 reduction for an extraordinary
item--early extinguishment of debt.
(4) Pro forma basic earnings per share and pro forma NAV per share were based
on pro forma shares outstanding as determined by dividing IGC's weighted
average Units outstanding by the Unitholders' percent ownership, 99%, and
dividing the result by two.
(5) Reflects the cash provided by operating, investing and financing activities
as reported on ACPP's audited statement of cash flows excluding cash
distributions to IGC.
(6) Management's determinations based on appraisals of land assets, valuations
of interests in apartment partnerships, management contracts and other
assets net of liabilities, exclusive of accrued income taxes. Such
determinations have been reviewed and considered by Robert A. Stanger & Co.
Inc. See "Appraisals."
(7) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(8) Includes a sale to an affiliate of 374 acres.
(9) Includes sales to affiliates of 4 acres and 3 acres for the years ended
December 31, 1996 and 1995, respectively.
28
<PAGE>
RISK FACTORS
Prospective investors in Common Shares should consider a number of factors
that may bear on the value of the Common Shares, the amount of cash
distributions to the Shareholders, and other matters affecting an investment
in Common Shares. These factors include the matters described below.
RESTRUCTURING RISKS
NO DISSENTERS' APPRAISAL RIGHTS.
IGC Unitholders who object to the Restructuring will have no dissenters'
appraisal rights (i.e., the right, instead of receiving Common Shares, to seek
a judicial determination of the "fair value" of their IGC Units and to compel
IGC to purchase IGC Units for cash in that amount) under Delaware law or the
Partnership Agreement of IGC, nor will such rights be voluntarily accorded to
the IGC Unitholders. All IGC Unitholders will be bound by the vote of IGC
Unitholders owning a majority of the outstanding IGC Units and a majority of
the votes cast by IGC Unitholders not affiliated with the Wilson Family, and
objecting IGC Unitholders will have no alternative to receipt of the Common
Shares in the Restructuring other than selling their IGC Units in the market.
See "The Special Meeting--No Dissenters' Appraisal Rights."
CONTROL OF ACPT.
The Wilson Family will be able to exert substantial control over votes on
matters affecting ACPT which may result in ACPT taking actions that confer
benefits on the Wilson Family not shared by other Shareholders. The Wilson
Family will collectively own 52.24% of the outstanding ACPT Common Shares
after the Restructuring. However, members of the Wilson Family collectively
will not own a majority interest in ACPT following the Private Offering.
Following the Restructuring, ACPT and IGC will compete for certain land sales
to the extent of the Retained Assets, and the Wilson Family's interests in
ACPT and IGC may pose potential conflicts. See "The Restructuring--The Private
Offering" and "Ownership of Common Shares."
CONFLICTS OF INTEREST.
ACPT is subject to certain conflicts of interest arising out of its
relationships with the Wilson Family and their affiliates. Generally these
relationships involve land sales, property management services, office leases,
and administrative services by or between ACPT and IBC, IGC or their
respective affiliates. See "Transactions with Related Parties." As a result of
these conflicts of interest, certain actions or decisions by these parties may
have an adverse effect on the interests of the Shareholders. ACPT has adopted
a policy that it will not, without the approval of a majority of independent
Trustees, (i) acquire from or sell to any Trustee, officer, employee, or
Shareholder who owns more than 2% of the Common Shares (an "Affiliated
Shareholder") or any entity in which a Trustee, officer, employee or
Affiliated Shareholder of ACPT beneficially owns more than a 1% interest, or
any affiliate of any of the foregoing, any property or other assets of ACPT,
(ii) make any loan to or borrow from any of the foregoing persons, or (iii)
engage in any other transaction with any of the foregoing persons. See
"Business and Properties of ACPT--Policies with Respect to Certain
Activities--Affiliate Transaction Policy."
ABSENCE OF EXISTING TRADING MARKET FOR COMMON SHARES.
Prior to the Distribution, there will be no public market for the Common
Shares or any securities of ACPT. ACPT has applied for listing of the Common
Shares on the AMEX and the PSE. However, no assurance can be given that such
listing will occur and, if so, that a trading market will develop following
the Distribution.
CHANGE IN VALUE OF SECURITIES; TRADING PRICE LESS THAN NET ASSET VALUE.
It is possible that the aggregate of the prices at which the Common Shares
and IGC Units trade after the Distribution may be less than the price at which
the IGC Units traded prior to the Distribution. However,
29
<PAGE>
management of IGC and ACPT believe that the combined trading price of the
Common Shares and the IGC Units after the Distribution will exceed the trading
price of the IGC Units prior to the Distribution. See "The Restructuring--
Principal Advantages of the Restructuring." Management believes that the
combined price of the IGC and ACPT shares will exceed the current value of IGC
shares because (i) ACPT Common Shares will be regarded as a more attractive
investment for institutions such as mutual funds and pensions funds as it will
receive income principally in the form of dividends and distributions from its
subsidiaries, (ii) ACPT Shareholders have voting rights with respect to the
election and removal of members of the ACPT Board of Trustees under the ACPT
Declaration of Trust, and (iii) ACPT's performance will not be burdened by the
wetlands litigation and certain other assets that in management's view do not
fit ACPT's business plan.
In addition, it is likely that the Common Shares will trade at a price
substantially lower than the $21.55 net asset value per share, as of March 31,
1998, determined by management based on appraisals of land assets and
valuations of interests in apartment properties, management contracts and
other assets.
ANTITAKEOVER EFFECTS.
The provisions of ACPT's Declaration of Trust on classification of the Board
of Trustees, restrictions on the ownership of Common Shares, the ability to
issue preferred shares, certain control share acquisition and business
combination statutes applicable to ACPT could have the effect of delaying,
deferring or preventing a transaction or a change in control of ACPT that
might involve a premium price for holders of Common Shares or otherwise be in
their best interest. See "Certain Provisions of Maryland Law and of ACPT's
Declaration of Trust and Bylaws."
OWNERSHIP LIMITATION.
In order to comply with the ownership limitation and certain other tests
that American Rental must meet to qualify as a REIT under the Code, ACPT's
Declaration of Trust, subject to certain exceptions, authorizes the trustees
to take such actions as are necessary and desirable to preserve American
Rental's qualification as a REIT and to limit any person (other than certain
current IGC Unitholders) to direct or indirect ownership of no more than 2% of
the outstanding Common Shares (the "Ownership Limit"). See "Income Tax
Considerations--Federal Income Tax Considerations--Federal Income Tax
Classification of American Rental--Share Ownership, Reporting." The foregoing
restrictions on transferability and ownership will continue to apply until (i)
the Board of Trustees determines that it is no longer in the best interests of
ACPT for American Rental to attempt to qualify, or to continue to qualify, as
a REIT and (ii) there is an affirmative vote of two-thirds of the votes
entitled to be cast on such matter at a regular or special meeting of the
Shareholders. The Ownership Limit may have the effect of delaying, deferring
or preventing a transaction or a change in control of ACPT that might involve
a premium price for the Common Shares or otherwise be in the best interest of
the Shareholders. See "Certain Provisions of Maryland Law and of ACPT's
Declaration of Trust and Bylaws."
POTENTIAL EFFECTS OF ISSUANCE OF ADDITIONAL SHARES.
ACPT's Declaration of Trust authorizes the Board of Trustees to (i) amend
the Declaration of Trust, without Shareholder approval, to increase or
decrease the aggregate number of shares of beneficial interest or the number
of shares of beneficial interest of any class, including Common Shares, that
ACPT has the authority to issue, (ii) cause the company to issue additional
authorized but unissued Common or Preferred Shares and (iii) classify or
reclassify any unissued Common Shares and Preferred Shares and to set the
preferences, rights and other terms of such classified or unclassified shares.
ACPT intends to issue in the Private Offering Preferred Shares, the terms of
which will be negotiated with the purchasers but may include rights to
preferential distributions, cumulative distributions and/or liquidation
preferences. See "The Restructuring--The Private Offering."
Although the Board of Trustees has no such intention to do so at the present
time, it could establish a class or series of shares of beneficial interest
that could, depending on the terms of such series, delay, defer or prevent a
transaction or a change in control of ACPT that might involve a premium price
for the Common Shares or
30
<PAGE>
otherwise be in the best interest of the Shareholders. See "Description of
Shares of Beneficial Interest" and "Certain Provisions of Maryland Law and of
ACPT's Declaration of Trust and Bylaws."
DEPENDENCE ON KEY PERSONNEL; WITHDRAWAL OF JAMES J. WILSON FROM MANAGEMENT.
ACPT is dependent on the efforts of its executive officers, particularly
Messrs. J. Michael Wilson, Edwin L. Kelly, Francisco Arrivi Cros and Paul
Resnik. The loss of their services could have an adverse effect on the
operations of ACPT. Prior to the Restructuring, each of Messrs. Kelly, Arrivi
and Resnik will enter into an employment agreement with ACPT. See
"Management--Employment Agreements."
In addition, James J. Wilson, the current Chief Executive Officer of IGC,
will not be a Trustee or officer of ACPT. The loss of Mr. Wilson's management
services could have an adverse effect on the operations of ACPT. However, in
order to provide continuity of management Mr. Wilson will enter into a
consulting agreement with ACPT pursuant to which he will provide consulting
services, including strategic planning and transaction advisory services, as
requested from time to time by the Board of Trustees over a period of ten
years following the Restructuring. See "Transactions with Related Parties--
Consulting Agreement."
CHANGE IN THE RIGHTS OF IGC UNITHOLDERS.
The rights of Shareholders will differ from the rights of IGC Unitholders in
several material respects. In particular, Common Shareholders cannot exercise
control over ACPT, as they can over IGC, by removing a general partner by
majority vote. However, Shareholders will vote annually to elect approximately
one third of the Trustees and they can remove any Trustee for cause by a
majority vote and for any reason by two-thirds vote. ACPT is obligated to
distribute annually an amount equal to 45% of net taxable income allocated to
Shareholders less the amount of certain taxes paid by ACPT, whereas IGC is
obligated to distribute 55% of net taxable income. In addition, no Shareholder
(except certain existing IGC Unitholders) may own more than 2% of the
outstanding Common Shares. See "Comparative Rights of IGC Unitholders and
Shareholders" and "Certain Provisions of Maryland Law and of ACPT's
Declaration of Trust and Bylaws."
POSSIBLE ADVERSE EFFECT OF MARKET INTEREST RATES ON PRICE OF COMMON SHARES.
One of the factors that will influence the market price of the Common Shares
in public markets will be the annual distribution rate on the Common Shares.
An increase in market interest rates may lead prospective purchasers of the
Common Shares to disinvest in ACPT in favor of higher yielding investments
which may adversely affect the market price of the Common Shares.
APPROVALS REQUIRED TO EFFECT THE RESTRUCTURING.
In addition to obtaining the approval of the IGC Unitholders, the
consummation of the Restructuring is subject to obtaining the approvals of
certain government entities, including HUD, certain of IGC's lenders, and
certain of the limited partner investors in the U.S. Apartment Partnerships.
Management of IGC expects to obtain all necessary approvals in a timely
manner. However there can be no assurance that such approvals will be obtained
on terms and conditions acceptable to IGC. See "The Restructuring--Approvals
Required to Effect the Restructuring."
POTENTIAL RETURN OF ACPT SHARES.
If in connection with claims by IGC creditors in a bankruptcy proceeding or
otherwise, a court were to find that at the time of the Distribution IGC was
insolvent or was rendered insolvent or that the Distribution otherwise
constituted a fraudulent conveyance or transfer, Unitholders who receive the
Distribution could be required to return the Common Shares (or equivalent
amounts) to IGC or its creditors. See "IGC After the Restructuring--Creditors
Rights."
31
<PAGE>
REAL ESTATE FINANCING RISKS
Following the Restructuring, the business of ACPT will be subject to certain
real estate financing risks that currently affect the business of IGC,
including the following:
RISING INTEREST RATES.
ACPT has, and may in the future incur, indebtedness that bears interest at
variable rates. Any increase in variable rates would adversely affect ACPT's
cash flow and the amounts available for distributions to Shareholders. If
lower interest rates can be obtained, ACPT may in the future refinance
existing debt as appropriate and cost effective.
In addition, any increase in interest rates generally may have an adverse
effect on the real estate businesses conducted by ACPT. Higher interest rates
generally increase the cost to customers of both commercial and residential
properties which may make real estate purchases less attractive. Consequently,
ACPT's revenues may decrease significantly in higher interest rate
environments.
Should ACPT in the future refinance existing debt, it may consider using
hedges or similar instruments, or purchase interest rate swaps. ACPT's
evaluation of the merits of using hedges or similar instruments will depend in
large part on the cost of such an approach and on federal income tax
restrictions. Further, in determining which, if any, strategy to reduce the
risk of rising interest rates there is no assurance that ACPT's evaluation of
interest rate risk will be accurate. ACPT recognizes that it may not be able
to sufficiently lower interest rate exposure through such measures, and that
these measures may create additional costs to ACPT. ACPT has not used hedges
or similar instruments and has not purchased interest rate swaps. As a result,
it has no experience in this area.
DEBT FINANCING AND POTENTIAL ADVERSE EFFECTS ON CASH FLOWS AND DISTRIBUTIONS.
ACPT will be subject to risks normally associated with debt financing,
including the risk that ACPT's cash flow will be insufficient to pay
distributions at expected levels and meet required payments of principal and
interest, and the risk that indebtedness on the apartment properties (which
will not have been fully amortized at maturity in all cases) will not be able
to be refinanced or that the terms of such refinancing will not be as
favorable as the terms of existing indebtedness. Upon consummation of the
Restructuring, ACPT expects to have outstanding indebtedness of approximately
$76,000,000 which will encumber substantially all of its assets. If principal
payments due at maturity cannot be refinanced, extended, or paid with proceeds
of other capital transactions, such as the issuance of Preferred Shares in the
Private Offering, ACPT expects that its cash flow will not be sufficient in
all years to pay distributions at expected levels and to repay all maturing
debt. Furthermore, if prevailing interest rates or other factors at the time
of refinancing result in higher interest rates upon refinancing, the interest
expense relating to such refinanced indebtedness would increase, which would
adversely affect ACPT's cash flow and the amounts available for distributions
to its Shareholders. If a property or properties are mortgaged to secure
payment of indebtedness and ACPT is unable to meet mortgage payments, the
property could be foreclosed upon by, or otherwise transferred to, the
mortgagee with a consequent loss of income and asset value to ACPT.
See "Management's Discussion and Analysis of Results of Operations and
Financial Condition--Liquidity and Capital Resources" for a summary of ACPT's
outstanding debt and the terms thereof.
CONSTRUCTION LOANS AND RISKS ASSOCIATED WITH SALE OR FORECLOSURE.
If new developments are financed through construction loans, there is a risk
that upon completion of construction permanent financing for newly developed
properties may not be available or may be available only on disadvantageous
terms. In the event that ACPT is unable to obtain permanent financing for a
developed property on favorable terms, it could be forced to sell such
property at a loss or the property could be foreclosed upon by the lender and
result in loss of income and asset value to ACPT.
32
<PAGE>
CHANGES IN POLICIES WITHOUT SHAREHOLDER APPROVAL.
The investment, financing, borrowing and distribution policies of ACPT and
its policies with respect to all other activities, including growth,
capitalization and operations, will be determined by the Board of Trustees.
Although ACPT's Board of Trustees has no present intention to do so, these
policies may be amended or revised at any time and from time to time at the
discretion of the Board of Trustees without a vote of the shareholders of
ACPT. A change in these policies could adversely affect ACPT's financial
condition, results of operations or the market price of the Common Shares. See
"Business and Properties of ACPT--Policies with Respect to Certain
Activities," and "Certain Provisions of Maryland Law and of ACPT's Declaration
of Trust and Bylaws."
REAL ESTATE INVESTMENT RISKS
Following the Restructuring, the business of ACPT will be subject to certain
real estate investment risks that currently affect the business of IGC,
including the following:
GENERAL RISKS.
Real property investments are subject to varying degrees of risk. The yields
available from equity investments in real estate depend in large part on the
amount of income generated and expenses incurred. If ACPT's assets do not
generate revenues sufficient to meet operating expenses, including debt
service, development costs, tenant improvements, leasing commissions and other
capital expenditures, ACPT may have to borrow additional amounts to cover
fixed costs and ACPT's cash flow and ability to make distributions to its
Shareholders will be adversely affected.
The community development and homebuilding businesses of ACPT will continue
to be influenced by the risks generally incident to the real estate business.
The availability of materials and labor and changes in the costs thereof may
also affect ACPT's business. Any increase in such expenses without a
corresponding increase in revenues would have an adverse impact on ACPT's
profitability. Any decrease in the availability of adequate land for
residential development, curtailments of access to or unavailability of sewer
or water connections due to local moratoria, and the possible adverse effects
of legislative, regulatory, administrative, judicial or enforcement changes
that may arise in the future at the national, state or local levels in the
areas, among others, involving tax laws, environmental controls and rent
regulations could be expected to decrease demand for real estate and therefore
adversely affect ACPT's business and profitability. These factors also effect,
to some degree, ACPT's management services operations and the value of its
real estate holdings. The business of ACPT also will be affected by
competition from other residential homebuilders and land developers, some of
which have greater experience and resources than ACPT, and from sellers of
existing homes and developed lots, and from condominium conversions. ACPT may
also be affected adversely by changes in the local economies in Southern
Maryland and Puerto Rico where ACPT retains community development and
homebuilding businesses, although ACPT does not anticipate such changes. See
"--Business and Properties of ACPT--Rental Apartment Properties--Puerto Rico"
and "--Community Development--St. Charles."
ACPT's revenues and the value of its rental properties may be adversely
affected by real estate conditions (such as oversupply of, or reduced demand
for, space and changes in market rental rates); the perceptions of prospective
tenants of the safety, convenience and attractiveness of the properties; the
ability of the owner to provide adequate management, maintenance and
insurance; the ability to collect on a timely basis all rent from tenants; the
expense of periodically renovating, repairing and reletting spaces; and
increasing operating costs (including real estate taxes and utilities) which
may not be passed through to tenants. Certain significant expenditures
associated with investments in real estate (such as mortgage payments, real
estate taxes, insurance and maintenance costs) are generally not reduced when
circumstances cause a reduction in rental revenues from the property. In
addition, real estate values and income from properties are also affected by
such factors as compliance with laws, including tax laws, interest rate levels
and the availability of financing. Also, the amount of available net rentable
square feet of commercial property is often affected by market conditions and
may therefore fluctuate over time.
33
<PAGE>
For its development activities, ACPT must obtain the approval of numerous
governmental authorities, such as zoning approvals, and State and county
permits, and changes in local circumstances or applicable law may necessitate
the application for additional approvals or the modification of existing
approvals.
OPERATING RISKS.
ACPT's rental apartment properties are subject to operating risks common to
rental apartments in general described below, any and all of which may
adversely affect occupancy or rental rates. The apartment properties are
subject to increases in operating expenses such as cleaning, electricity,
heating, ventilation and air conditioning, elevator repair and maintenance,
insurance and administrative costs, and other general costs associated with
security, landscaping, repairs and maintenance. 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. While
ACPT implements cost-saving incentive measures at each of its apartment
properties, ACPT's ability to make distributions to Shareholders could be
adversely affected if operating expenses increase without a corresponding
increase in revenues.
DEVELOPMENT OF ST. CHARLES.
ACPT's interest in St. Charles, in which more than 4,500 acres of land
remain to be developed, is one of ACPT's most valuable assets. ACPT's success
in large part will be dependent upon the continued successful development of
St. Charles. See "Business and Properties of ACPT--Community Development." In
addition to the risks generally incident to real estate businesses, there are
particular risks associated with the development of St. Charles. These risks
include (i) the need to obtain additional zoning and other approvals of the
Planning Commission and the County Commissioners of Charles County, Maryland
(the "Planning Commission", the "County Commissioners" and the "County,"
respectively) to permit the full development of St. Charles; (ii) the
possibility that the continued and timely development of St. Charles may be
affected by environmental laws and regulations applicable to "wetlands"; and
(iii) the failure or delay of other residential developers active in the area
to proceed with projects that would be beneficial to ACPT. These projects
include the Chapman's Landing and Kingsview residential developments in
Charles County. Chapman's Landing is scheduled to commence development in 1998
on the first phase of 576 units and Kingsview currently has 640 lots under
development. Although these projects may compete directly with ACPT for
homebuying customers, management of ACPT believes that increased occupancy and
interest in residential developments in the Charles County area in general
will have a beneficial effect on ACPT's ability to market its residential
properties.
LITIGATION INVOLVING ST. CHARLES DEVELOPMENT.
St. Charles has been zoned as a planned unit development that allows
construction of approximately 24,730 housing units and 1,390 acres of
commercial and industrial development. The County has agreed to provide
sufficient water and sewer connections for all housing units remaining to be
developed in St. Charles. However, IGC, SCA and ACPT are involved in
litigation with the County regarding the cost of water and sewer fees and
impact fees previously paid by IGC and SCA. The County established fees based
on a study that it claims was appropriate. IGC and SCA claim that the County
has failed to conduct an appropriate water and sewer connection fee study as
the basis on which to set such fees for the St. Charles communities. This
matter has been the subject of extensive previous litigation, and in 1992 the
Circuit Court for Charles County rendered judgment in favor of SCA and IGC
requiring the County to conduct an appropriate study. Litigation filed by SCA
and IGC in 1997 seeks to enforce the prior court orders that requires the
County to conduct the appropriate water and sewer connection fee study, to
reduce the connection fees paid prospectively in the St. Charles communities,
and to obtain repayment of excess fees paid in the past. The matter has not
yet been decided by the Circuit Court for Charles County. See "Legal
Proceedings--IGC--Other Litigation."
Management of ACPT internally has raised concerns regarding the future
development of land in St. Charles owned by ACPT and others that may be
classified as wetlands. (The U.S. Army Corps of Engineers (the "Corps")
regulations define "wetlands" as areas saturated by surface or ground water
sufficient to support
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vegetation typically adapted for life in saturated soil conditions.) However,
ACPT obtains determinations as to whether properties are within the Corps'
jurisdiction as wetlands prior to the development of any properties, and has
developed certain environmental policies and procedures to avoid violations.
While ACPT does not believe that any of the foregoing factors will materially
adversely affect the planned development of St. Charles on a timely basis, no
assurance can be made that this will be the case. See "Business and Properties
of ACPT--Community Development," and "Legal Proceedings."
TERMINATION OF HUD SUBSIDY CONTRACTS; NEW APARTMENT DEVELOPMENT.
Changes in government regulations could significantly affect the status of
the ACPT's existing U.S. and Puerto Rico apartment properties and its
development of future projects. Of the 2,246 rental units in the U.S., 993 are
subject to subsidies, and all 2,653 units in Puerto Rico are subject to
subsidies. See "Business and Properties of ACPT--Rental Apartment Properties."
The federal government has virtually eliminated subsidy programs for new
construction of low and moderate income housing by profit-motivated developers
such as ACPT. No new construction of apartment projects is expected in Puerto
Rico and any new apartment properties developed by ACPT in the United States
most likely will offer market rate rents which may adversely affect the
ability of ACPT to successfully rent such properties. New rental apartment
projects also may be affected by certain newly enacted tax law changes.
The subsidy contracts for ACPT's existing investment apartment properties
are scheduled to expire between 1997 and 2020. See "Business and Properties of
ACPT--Rental Apartment Properties," for a summary of the terms of the
applicable subsidy contracts. Under a recently enacted law, such contracts may
be renewed by the United States Department of Housing and Urban Development
("HUD") on a year to year basis and ACPT intends to seek renewal of expiring
subsidy contracts for its U.S. properties. ACPT currently intends to convert
to condominiums those apartment properties in Puerto Rico for which the
subsidy contracts expire over the next several years. Two such conversions are
currently in progress. Because the Federal tax rules governing REITs would
impose a substantial tax penalty on any conversion of ACPT's U.S. apartment
properties into condominiums, ACPT does not intend to convert any U.S.
apartment properties if the subsidy contracts for such properties are not
renewed. ACPT intends to offer units in such properties for rent at market
rates, which may adversely affect the occupancy rates in such properties. See
"Business and Properties of ACPT--Condominium Conversions."
COMPETITION.
Real estate development carries risks from competition by other entities and
fluctuations in the housing market. ACPT's apartments in St. Charles that have
market rate rents are impacted by the supply and demand for competing rental
apartments in the area.
Likewise, the local housing market affects performance generally. When for-
sale housing becomes more affordable due to lower mortgage interest rates or
softening home prices, this can adversely impact the performance of rental
apartments. ACPT's land development for home sales also faces competition. The
number of residential building permits issued by Charles County according to
figures released by the county's Department of Planning and Growth Management
has increased yearly from 1993, when 962 permits were issued, to 1997, when
1,232 permits were issued. In addition, there are approximately 30
subdivisions competing for new home buyers within five miles of St. Charles.
The largest competing housing developments are Kingsview, a 640 unit project
being developed by Miller & Smith, Southwinds, a 367 unit project being
developed by Washington Homes, and Chapman's Landing, a 576 unit project being
developed by Legend Properties. Smaller projects are being developed by more
than 20 other developers. Competition in the San Juan metropolitan area with
ACPT's Parque Escorial planned community for lot sales for residential
building comes primarily from small-scale condominium projects, as Parque
Escorial is one of only two master planned communities currently under
development in the area. See "Business and Properties of ACPT."
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POSSIBLE ENVIRONMENTAL LIABILITIES.
Under various federal, state, and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of remediation of hazardous or toxic substances on, under
or in such property. Such laws often impose liability whether or not the owner
or operator knew of, or was responsible for, the presence of such hazardous or
toxic substances. At the federal level, the relevant environmental laws
include the Clean Water Act, which generally prohibits persons from polluting
waters of the United States with substances or materials attributable to
sewage, industrial waste or other waste in amounts that are unsightly,
malodorous, a nuisance or that interfere in any way with the water's
designated use; the Resource Conservation and Recovery Act ("RCRA"), which
regulates current hazardous waste handling and disposal; and the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), which
regulates the remediation of past environmental contamination. Applicable
Maryland environmental statutes and regulations include the Maryland National
Pollutant Discharge Elimination System implementing the provisions of the
federal Clean Water Act; the Maryland Nontidal Wetlands Protection Act of 1989
and the Maryland Wetlands Act of 1970, regulating activities in nontidal and
tidal wetlands respectively; and regulatory authority pertaining to non-
hazardous solid waste. Puerto Rico environmental legislation includes the
Public Policy Environmental Act, which creates an Environmental Quality Board
(EQB) that has responsibility for implementing regulations under the Clean
Water Act, RCRA, CERCLA, and other federal environmental legislation. The EQB
has promulgated the Water Quality Standards Regulation, Regulations for the
Control of Hazardous and Non-Hazardous Solid Wastes, and Non-Hazardous Solid
Waste Management Regulation.
In addition, the presence of hazardous or toxic substances, or the failure
to remediate such property properly, may adversely affect the owner's ability
to borrow using such real property as collateral. Persons who arrange for the
disposal or treatment of hazardous or toxic substances may also be liable for
the costs of removal or remediation of hazardous substances at the disposal or
treatment facility, whether or not such facility is or ever was owned or
operated by such person. Certain environmental laws and common law principles
could be used to impose liability for release of and exposure to hazardous
substances, including asbestos-containing materials ("ACMs") into the air, and
third parties may seek recovery from owners or operators of real properties
for personal injury or property damage associated with exposure to released
hazardous substances, including ACMs.
Management of ACPT believes that its properties and operations in St.
Charles will not be materially adversely affected by hazardous or toxic
substances on such properties. Phase I Environmental Site Assessments have
been prepared for substantially all undeveloped parcels in St. Charles which
revealed no significant environmental concerns. Remediation has been completed
at three sites in Parque Escorial and the Puerto Rico Department of Natural
Resources has determined that such sites no longer contain environmental
hazards. See "Business and Properties of ACPT--Community Development." In
addition, approximately ten acres of land in Canovanas that is used as a
burial ground for horses may not be developed for a period of five years after
burials cease. Environmental assessments prepared for the remaining
undeveloped land in Parque Escorial and Canovanas revealed no significant
environmental concerns. However, the management of IGC can give no assurance
that significant environmental liability will not arise in the future with
respect to the property acquired by ACPT.
EFFECT OF AMERICANS WITH DISABILITIES ACT COMPLIANCE ON CASH FLOW AND
DISTRIBUTION.
Under the Americans with Disabilities Act of 1990 (the "ADA"), all public
accommodations and commercial facilities are required to meet certain federal
requirements related to access and use by disabled persons. Compliance with
the ADA requirements could require removal of access barriers and non-
compliance could result in imposition of fines by the U.S. government or an
award of damages to private litigants. Although ACPT believes that its
properties are substantially in compliance with these requirements, a
determination that ACPT is not in compliance with the ADA could result in the
imposition of fines or an award of damages to private litigants. If ACPT were
required to make unanticipated expenditures to comply with the ADA, ACPT's
cash flow and the amounts available for distributions to its shareholders may
be adversely affected.
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CHANGE IN TAX LAWS; BUILDING SAFETY REGULATIONS.
Because increases in income, service or transfer taxes are generally not
passed through to tenants under residential leases, as they would be under
commercial leases, any change to current federal, state or local tax laws
which results in an increase in such taxes may have the effect of reducing the
cashflow from ACPT's existing or future apartment and commercial rental
properties. ACPT's rental properties also are subject to various federal,
state and local regulatory requirements regarding building safety, including
fire safety codes and building materials regulations. Failure to comply with
these requirements could result in the imposition of fines by governmental
authorities or awards of damages to private litigants. ACPT believes that its
properties are currently in compliance with all such regulatory requirements.
However, there can be no assurance that these requirements will not be changed
or that new requirements will not be imposed which would require significant
unanticipated expenditures by ACPT. ACPT currently is not aware of any
proposed changes in tax laws or building safety regulations. However, any
increase in expense due to tax increases or increased costs for regulatory
compliance could adversely impact the cashflows of ACPT and thereby reduce the
amount distributable to Shareholders.
UNINSURED LOSS.
ACPT will initially carry comprehensive liability, fire, flood, (where
appropriate), extended coverage and rental loss insurance with respect to its
properties with policy specifications and insured limits customarily carried
for similar properties. There are, however, certain types of losses (such as
from hurricanes, wars or earthquakes) that may be either uninsurable, only
partially insurable, or not economically insurable. Should an uninsured loss
or a loss in excess of insured limits occur, ACPT could lose both its capital
invested in a property, as well as the anticipated future revenue from such
property, and would continue to be obligated on any mortgages indebtedness or
other obligations related to the property. Any such loss would adversely
affect the business of ACPT and its financial condition and results of
operations.
RISKS INVOLVED IN PROPERTY OWNERSHIP THROUGH PARTNERSHIPS, LIMITED LIABILITY
COMPANIES, AND JOINT VENTURES.
ACPT may in the future acquire either a limited partnership interest in a
property partnership without partnership management responsibility or a
membership interest in a limited liability company without company management
responsibility or a co-venturer interest, membership interest, or co-general
partnership interest in a property partnership or limited liability company
with shared responsibility for managing the affairs of a property partnership,
limited liability company, or joint venture and, therefore, would not be in a
position to exercise sole decision-making authority regarding the property
partnership, limited liability company, or joint venture. Such partnership or
joint venture investments may, under certain circumstances, involve risks not
otherwise present, including the possibility that ACPT's partners, co-members,
or co-venturers might at any time have economic or other business interests or
goals that are inconsistent with the business interests or goals of ACPT, and
that such partners, co-members, or co-venturers may be in a position to take
action contrary to the instructions or the requests of ACPT or contrary to
ACPT's policies or objectives, including ACPT's policy with respect to
maintaining American Rental's qualification as a REIT. ACPT would, however,
seek to maintain sufficient control of such partnerships, limited liability
companies, or joint ventures to permit ACPT's business objectives to be
achieved. There is no limitation under ACPT's organizational documents as to
the amount of available funds that may be invested in partnerships, limited
liability companies, or joint ventures.
RISKS ASSOCIATED WITH ILLIQUIDITY OF REAL ESTATE.
Equity real estate investments are relatively illiquid. Such illiquidity
will tend to limit the ability of ACPT to vary its portfolio promptly in
response to changes in economic or other conditions. ACPT's primary investment
criteria is to invest, hold and develop assets that will generate cash
available for distribution to its Shareholders. ACPT acquires or develops
assets where ACPT believes that opportunities exist for acceptable investment
returns in areas that utilize the expertise of its management, primarily
community development and commercial and residential rental properties. In
addition, the Code limits the ability of a REIT to sell properties
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held for fewer than four years, including converting apartment properties into
condominiums, which may affect American Rental's ability to sell properties
without adversely affecting returns to holders of Common Shares.
RISKS ASSOCIATED WITH ACQUISITION, DEVELOPMENT AND CONSTRUCTION.
ACPT intends to acquire residential properties to the extent that they can
be acquired on advantageous terms and meet ACPT's investment criteria. ACPT's
primary investment criteria is to invest, hold and develop assets that will
generate cash available for distribution to its Shareholders. ACPT acquires or
develops assets where ACPT believes that opportunities exist for acceptable
investment returns in areas that utilize the expertise of its management,
primarily community development and commercial and residential rental
properties. Acquisitions of residential properties entail risks that
investments will fail to perform in accordance with expectations and that
estimates of the costs of improvements to bring an acquired property up to
standards established for the market position intended for that property may
prove inaccurate.
ACPT intends to continue development and construction of residential
buildings. Risks associated with ACPT's development and construction
activities may include: abandonment of development opportunities; construction
or development costs of a property exceeding original estimates, possibly
making the property uneconomical; occupancy rates and rents at a newly
renovated or completed property may not be sufficient to make the property
profitable; financing may not be available on favorable terms for
redevelopment or development of a property; unreliability of the contractor or
contractors selected to develop or construct a project; permanent financing
may not be available on lease-up or a project may not be completed on
schedule, resulting in increased debt service activities. In addition, most
development projects, regardless of whether they are ultimately successful,
typically require a substantial portion of management's time and attention.
Development activities are also subject to risks relating to the inability to
obtain, or delays in obtaining, all necessary zoning, land-use, building,
occupancy and other required governmental permits and authorizations. In
addition, there are general investment risks associated with any new real
estate investment. See "--General Risks".
If a project undertaken by ACPT is subject to one or more of the foregoing
events, it may result in such project being unprofitable or in losses for
ACPT, which would reduce the amount distributable to Shareholders.
TAX RELATED RISKS
GAIN RECOGNIZED ON ASSET TRANSFERS.
Gain will be recognized by IGC on the transfer of certain interests in the
U.S. Apartment Partnerships as a result of American Housing's assumption of
liabilities in excess of the tax basis of the property contributed to American
Housing. IGC has estimated that approximately $3.5 million in gain will be
recognized on this transfer. Gain will also be recognized by IGC on the
transfer of the Class A interest in IGP as a result of IGP Group's assumption
of liabilities in excess of the tax basis of property contributed. IGC has
estimated that approximately $2.6 million will be recognized on this transfer.
All of the gain recognized by IGC on the transfers to American Housing and IGP
Group will be allocated to IBC because IGC has determined that all of such
gain is attributable to appreciated property originally contributed to IGC by
IBC. IGC Unitholders other than IBC will not recognize any portion of such
gain under IGC's method of allocating such gain. However, there can be no
assurance that the Internal Revenue Service ("IRS") will not challenge this
allocation method and seek to allocate a portion of such gain to the
Unitholders. See "Income Tax Considerations--Federal Income Tax
Considerations--Certain Tax Consequences of the Asset Transfers."
There can be no assurance that certain transfers that will be delayed until
certain consents are obtained or until a year and a day has elapsed will
qualify for nonrecognition treatment. See "Transactions with Related Parties--
Staggered Transfer of Partnership Interests to American Housing" and "Income
Tax Considerations--Federal Income Tax Considerations--Certain Tax
Consequences of the Asset Transfers." If such transfers do not qualify, gain
would be recognized by IGC in the amount that the fair market value of the
property transferred by IGC in the nonqualifying transfer exceeds IGC's tax
basis in such property and such gain would be allocated
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to IBC to the extent that it is attributable to appreciated property
originally contributed by IBC and the remaining gain would be allocated pro-
rata among all of the Unitholders. IGC will include in its taxable income its
share of income, gain, loss, and deduction with respect to certain retained
interests in two U.S. Housing Partnerships even though it is contractually
obligated to transfer all distributions it receives with respect to such
interests to American Housing or American Land. Because these transfers will
be treated as made in connection with, or as, contributions to capital, IGC
will not receive a deduction with respect to such transfers.
Gain generally is recognized when appreciated property is transferred by a
United States person to a foreign corporation in the amount of the excess of
the fair market value over the basis of the transferred property, unless the
transfer qualifies for an exception to this gain recognition rule. See "Income
Tax Considerations--Federal Income Tax Considerations--Certain Tax
Consequences of the Asset Transfers" The determination of whether the transfer
of assets by IGC to IGP Group will qualify for such an exception will be made
on the basis of all of the facts and circumstances and will depend on the
extent and nature of services to be provided by employees of IGP in the
future, and on the application of general rules to a more complex ownership
structure than was anticipated in such rules. Thus, there can be no assurances
that these asset transfers will qualify for the exception. In addition, there
can be no assurances that the IRS will not attempt to treat the Class B
interests in IGP as a transfer of appreciated property to a foreign
corporation and that IGC must recognize gain on such transfer in the amount
that the fair market value of such property exceeds its adjusted tax basis.
As a result of the Asset Transfers and other steps taken by IGC to maintain
its status as a partnership for federal tax purposes, it is possible that
Shareholders will have a lower tax basis in their Common Shares than if the
Asset Transfers and such other steps had not been taken. In addition, there
can be no assurances that the positions adopted by IGC in the Asset Transfers
and other steps taken by IGC to reduce its non-qualifying income will not be
successfully challenged by the IRS.
The above-described risks could result in gain being recognized by
Unitholders upon the Asset Transfers. The amount of such gain has not been
determined.
RISK OF GAIN AND REDUCED DISTRIBUTIONS IF IGC IS NOT CLASSIFIED AS A
PARTNERSHIP.
The general rule that publicly traded partnerships are taxed as corporations
does not apply to a publicly traded partnership for a taxable year if at least
90% of the organization's gross income for such taxable year constitutes
"qualifying income."
IGC has represented that it will take steps in order to ensure that it will
meet the "90% qualifying income" test for 1998. Based on unaudited results,
IGC management believes that IGC meets the "90% qualifying income" test
through June 30, 1998. However, there can be no assurances that IGC's efforts
will be successful or that IGC will generate sufficient amounts of qualifying
income to prevent being treated as a corporation for tax purposes as of
January 1, 1998. It is possible that the determination of whether IGC will be
treated as a corporation as of January 1, 1998, will not be certain until
after the Distribution and it is also possible that the Distribution could
adversely affect the determination of whether IGC will be treated as a
corporation as of January 1, 1998, because the Distribution will remove a
potential source of a significant amount of gross income of the type that
would allow IGC to qualify for an exception from the general rule that
publicly traded partnerships are taxed as corporations.
If IGC is treated as a corporation as of January 1, 1998: (1) gain would be
recognized by the Unitholders to the extent that IGC's liabilities exceed the
adjusted tax basis of its assets; (2) gain would be recognized to IGC on the
Distribution and would be taxable to IGC at corporate tax rates (the current
maximum rate is 35%) to the extent that the fair market value of the ACPT
Common Shares exceed IGC's adjusted tax basis in such Common Shares
immediately before the Distribution; and (3) an amount equal to the value of
the Common Shares generally would be treated as a distribution to the
Unitholders taxable as a dividend to the extent of IGC's "earnings and
profits" (for the period that it was treated as a corporation), then a return
of capital to the extent
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of the Unitholder's basis in his or her Units, and then gain from the sale or
exchange of property. See "Income Tax Considerations--Federal Income Tax
Considerations--Federal Income Tax Classification of IGC."
The Restructuring is contingent upon a determination that IGC will be
classified as a partnership for federal tax purposes for 1998. See "The
Special Meeting--Recommendation of the Board of Directors of IGMC."
CORPORATE LEVEL TAXES REDUCE AMOUNTS AVAILABLE FOR DISTRIBUTION.
Prior to the Restructuring, IGC has had no significant federal tax
obligations because entities treated as partnerships for federal tax purposes
are not subject to income taxes at the entity level. After the Restructuring,
certain activities that were previously conducted through partnership entities
will be contributed to corporations or other entities treated as corporations
for federal tax purposes. Although Management has attempted in the
Restructuring to reduce the "double" taxation that generally occurs when a
corporation distributes its profits to its Shareholders, significant amounts
of corporate-level taxes may be imposed upon American Land and American
Management, and could be imposed upon American Rental if it does not qualify
as a REIT and upon ACPT if it does not qualify as a partnership for federal
tax purposes. See "Income Tax Considerations--Federal Income Tax
Considerations--Federal Income Tax Classification of ACPT" and "--Federal
Income Tax Classification of American Land and American Management." Corporate
level taxes will reduce the amounts otherwise available for distribution to
the Shareholders.
REDUCED DISTRIBUTIONS AND SHARE VALUE IF AMERICAN RENTAL DOES NOT QUALIFY AS A
REIT.
American Rental intends to elect to be treated as a REIT for federal tax
purposes. Subject to the qualifications, assumptions, and representations set
forth under "Income Tax Consequences--Federal Income Tax Consequences--Federal
Income Tax Classification of American Rental--Counsel's Opinion Relating to
Qualification of American Rental as a REIT," Counsel is of the opinion that
(i) American Rental will be organized in conformity with the requirements for
qualification as a REIT beginning with its taxable year ending December 31,
1998, and (ii) its proposed method of operations described in this Proxy
Statement/Prospectus will enable it to satisfy the requirements for such
qualification. See "Income Tax Considerations--Federal Income Tax
Considerations--Federal Income Tax Classification of American Rental--
Counsel's Opinion Relating to Qualification of American Rental as a REIT."
The rules governing REITs are highly technical and require ongoing
compliance with a variety of tests. Counsel will not monitor American Rental's
compliance with these requirements. At the time of the Distribution, American
Rental will not meet all of these requirements. Counsel's opinion on American
Rental's REIT status assumes that ACPT, American Rental, and members of the
Wilson Family will take certain steps to comply with the REIT requirements.
However, no assurance can be given that American Rental will qualify as a REIT
for any particular year, or that the applicable law will not change and
adversely affect American Rental, ACPT, and its Shareholders. See "Income Tax
Considerations--Federal Income Tax Considerations--Federal Income Tax
Classification of American Rental."
For additional risks relating to American Rental's qualification as a REIT,
see "Income Tax Considerations--Federal Income Tax Considerations--Federal
Income Tax Classification of American Rental--General REIT Qualification
Requirements, Ownership Structure, and Stapled Stock Rules," and "Income Tax
Considerations--Federal Income Tax Considerations--Federal Income Tax
Classification of American Rental--Share Ownership, Reporting."
If American Rental does not qualify as a REIT, it would be classified as an
association taxable as a corporation, and American Rental would be taxable on
its income (determined without the deduction for distributions generally
applicable to REITs) at the applicable corporate rate and distributions to
ACPT generally would be taxable to the Shareholders as dividends. Treatment of
American Rental as an association taxable as a corporation could result in a
material reduction in the anticipated cash flow to Shareholders and could have
an
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adverse effect on the value of the Common Shares. See "Income Tax
Considerations--Federal Income Tax Considerations--Federal Income Tax
Classification of American Rental--Failure to Qualify as a REIT."
REDUCED DISTRIBUTIONS AND LOSS OF TAX CREDITS UPON RECLASSIFICATION OF IGP
GROUP.
IGP Group will be formed as a Puerto Rico corporation that will be treated
as a corporation for federal tax purposes. IGP Group intends to qualify as a
special partnership that is treated as a "pass-through" entity for Puerto Rico
income tax purposes. As a special partnership for Puerto Rico income tax
purposes, all of IGP Group's Puerto Rico source income will be taxable to its
partner ACPT, which will be treated as a foreign corporation for Puerto Rico
tax purposes. See "Income Tax Considerations--Federal Income Tax
Considerations--Certain Puerto Rico Income Tax Consequences." For United
States tax purposes, each Shareholder will be considered to have paid his or
her allocable share of any Puerto Rico income taxes paid by ACPT on its Puerto
Rico source income. Such taxes may give rise to a foreign tax credit (subject
to applicable limitations) or to a deduction for United States income tax
purposes. If IGP Group fails to qualify as a special partnership and is
treated as a corporation for Puerto Rico income tax purposes it would be
subject to Puerto Rico income tax on its Puerto Rico source income, and ACPT
and the Shareholders would not be treated as having paid any taxes to Puerto
Rico with respect to the Puerto Rico source income of IGP Group. Treatment of
IGP Group as a corporation for Puerto Rico tax purposes could have an adverse
effect on the value of the Common Shares. See "Income Tax Considerations--
Federal Income Tax Considerations--Federal Income Taxation of ACPT and
Shareholders--Foreign Tax Credit."
The rules governing special partnerships are highly technical and require
ongoing compliance with a variety of tests that depend among other things, on
the nature of future partnership income. Puerto Rico counsel will not monitor
IGP Group's compliance with these requirements. While IGP Group intends to
satisfy these tests, no assurance can be given that IGP Group will qualify as
a special partnership for any particular year, or that the applicable laws and
regulations will not change and adversely affect IGP Group, ACPT and its
shareholders. IGP Group's qualification as a "pass-through" entity for Puerto
Rico tax purposes is based, in part, on private rulings issued by the Puerto
Rico Department of Treasury in connection with IGP. These rulings are not
binding on the Puerto Rico Department of Treasury and there is no guarantee
that their principles will be followed in evaluating IGP Group's situation.
If IGP Group and any domestic corporation were found to be "stapled
entities," IGP Group would be treated as a domestic corporation and would be
subject to federal income tax on its world-wide taxable income at rates
applicable to U.S. corporations (the current highest rate is 35%) and
distributions to ACPT would be taxable as dividends to the extent of earnings
and profits, nontaxable dividends to the extent of basis, and then as capital
gain. See "Income Tax Considerations--Federal Income Tax Considerations--
Federal Income Tax Classification of American Rental--General REIT
Qualification Requirements, Ownership Structure, and Stapled Stock Rules."
POSSIBLE TAX LIABILITIES IN EXCESS OF CASH DISTRIBUTIONS.
A Shareholder generally will be subject to federal income tax on his or her
allocable share of ACPT's taxable income without regard to distributions.
However, for the treatment of certain Puerto Rico Shareholders, see "Income
Tax Considerations--Federal Income Tax Considerations--Federal Income Taxation
of ACPT and Shareholders--Puerto Rico Shareholders." ACPT will be required to
distribute annually to Shareholders, in cash and/or property, an amount equal
to 45% of the net taxable income of ACPT allocated to Shareholders less the
amount of taxes paid by ACPT in Puerto Rico and other foreign countries and
certain federal taxes paid by American Rental with respect to undistributed
capital gains. If ACPT's income consists largely of cash dividends as
expected, it is likely that ACPT will have sufficient cash to distribute to
the shareholders. However, there can be no assurance that ACPT will make
distributions in any given year that provide Shareholders with sufficient cash
to meet their federal income tax liabilities with respect to their share of
ACPT's income. See "Distribution Policy" and "Income Tax Considerations--
Federal Income Tax Considerations--Federal Income Tax Classification of ACPT."
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In addition, following the Restructuring it is possible that IGC may
recognize taxable income without receiving sufficient cash to enable IGC to
make a distribution to the IGC Unitholders in an amount at least equal to the
IGC Unitholder's tax liability arising from their share of IGC taxable income.
REDUCED DIVIDENDS AND SHARE VALUE IF ACPT IS NOT CLASSIFIED AS A PARTNERSHIP.
The federal income tax treatment contemplated for ACPT and the Shareholders
will be available only if ACPT is classified as a "partnership" for federal
income tax purposes and not as an "association" taxable as a corporation.
Subject to the qualifications, assumptions, and representations set forth in
"Income Tax Considerations--Federal Income Tax Considerations--Federal Income
Tax Classification of ACPT--Counsel's Opinion of Federal Income Tax
Classification of ACPT," Counsel is of the opinion that, under current laws
and regulations and interpretations thereof, ACPT will be classified as a
"partnership" for federal income tax purposes. Counsel's opinion, depends upon
the continued satisfaction of certain conditions by ACPT, as described in
"Income Tax Considerations--Federal Income Tax Considerations--Federal Income
Tax Classification of ACPT." There can be no assurance that these conditions
will continue to be met.
If ACPT were to be classified as an association taxable as a corporation for
any year, ACPT would be taxable on its profits at the applicable corporate
rate and distributions to the Shareholders generally would be taxable as
dividends. In addition, under such circumstances, Shareholders would not be
eligible for foreign tax deductions or credits with respect to Puerto Rico
taxes paid by ACPT. See "Income Tax Considerations--Federal Income Tax
Considerations--Federal Income Taxation of ACPT and Shareholders--Foreign Tax
Credit." Treatment of ACPT as an association taxable as a corporation would
result in a material reduction in the anticipated cash flow to Shareholders
and would have an adverse effect on the value of the Common Shares. See
"Income Tax Considerations--Federal Income Tax Considerations--Federal Income
Tax Classification of ACPT."
LIMITATIONS ON AVAILABILITY OF FOREIGN TAX CREDITS.
For United States tax purposes, each Shareholder will be considered to have
paid his allocable share of any Puerto Rico income taxes paid by ACPT.
Shareholders generally may claim a foreign tax credit (subject to applicable
limitations) or a deduction for federal income tax purposes. The taxes payable
to Puerto Rico by ACPT might not be fully creditable by Shareholders because
of limitations on the use of such credits, and the application of such
limitations to Puerto Rico taxes paid by ACPT may be complex due to
differences between the federal and Puerto Rico tax accounting and entity
classification provisions. See "Income Tax Considerations--Federal Income Tax
Considerations--Federal Income Taxation of ACPT and Shareholders--Foreign Tax
Credit. In addition, Foreign Tax Credits would not be available to
Shareholders if IGP Group is treated as a corporation for Puerto Rico income
tax purposes or if Puerto Rico were to become a state.
SALE BY ACPT OF SUBSIDIARY ENTITIES COULD AFFECT FUNGIBILITY AND VALUE OF
SHARES.
ACPT will not make an election under Section 754 of the Code to adjust the
tax basis of its property upon sales and certain other transfers of Common
Shares. If ACPT sells all or a portion of its interests in American Land,
American Management, American Rental, or IGP Group, the proportionate share of
the gain or loss recognized by a Shareholder could vary depending on whether
or not such Shareholder purchased its Common Shares from a person that
originally contributed property to IGC. It is possible that in certain
circumstances, the trading market for the Common Shares could be adversely
affected because the Common Shares were not fungible. See "Income Tax
Considerations--Federal Income Tax Considerations--Federal Income Taxation of
ACPT and Shareholders--Section 754 Election."
GUIDANCE ON RECENT CHANGES IN LAW AND LEGISLATIVE PROPOSALS MAY HAVE ADVERSE
CONSEQUENCES.
The Taxpayer Relief Act of 1997 (Pub. L. 105-34) ("1997 Act") made
significant changes to the Code, including changes relating to the treatment
of partnerships and REITs. It may be some time before the IRS issues
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regulations or other formal guidance under the 1997 Act. It is possible that
such regulations or other formal guidance could interpret the relevant law in
a manner that is contrary to this discussion or contrary to the opinion of
Counsel, and such interpretation could be applied retroactively. It is also
possible that there will be further significant changes in the applicable law
in the future, particularly in the rules for qualification as a REIT. This
activity could have a negative impact on the determination of whether American
Rental qualifies as a REIT.
THE SPECIAL MEETING
MATTERS PRESENTED FOR VOTE.
The special meeting of IGC Unitholders will be held on August 31, 1998. IGC
management and representatives of Arthur Andersen LLP will be present at the
meeting.
This Proxy Statement/Prospectus is being furnished to the holders of IGC
Units in connection with the solicitation by IGMC of proxies from IGC
Unitholders for use at the special meeting.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF IGMC.
The Board of Directors of IGMC, by unanimous vote, has approved the
Restructuring, believes that the terms of the Restructuring are in the best
interests of the IGC Unitholders, and recommends that IGC Unitholders vote in
favor of approving the Restructuring.
The Restructuring is contingent upon a determination that IGC will be
classified as a partnership for federal income tax purposes for the year 1998.
In making this determination, management of IGC will analyze IGC's income and
seek an opinion of counsel that IGC will be classified as a partnership for
federal income tax purposes. Such opinion will be based on unaudited income
amounts and projections furnished to counsel by IGC. To be classified as a
partnership, at least 90% of IGC's gross income in 1998 must be derived from
qualifying "passive type" sources such as interest, dividends and real
property income. IGC intends to take steps to ensure that it will comply with
this 90% test for 1998. Based on unaudited results, IGC management believes
that IGC meets the "90% qualifying income" test through June 30, 1998.
However, there is no assurance that these measures will be successful. See
"Income Tax Considerations--Federal Income Tax Considerations--Federal Income
Tax Classification of IGC."
The Board of Directors of IGMC did not make any determination regarding
fairness of the Restructuring and there were no arms-length negotiations
regarding the terms of the Restructuring because the Restructuring consists of
internal transfers of assets and the spin-off to limited partners, including
IGC Unitholders, on a pro rata basis of certain IGC assets and because once it
was determined that IGC would continue to be listed on the AMEX and PSC, no
fairness determination was required under the Exchange Act. With respect to
ACPT's employee plans, consulting contract and other arrangements incidental
to the Restructuring management may have conflicts of interest. However, such
arrangements were approved by the Board of Directors of IGMC, including
directors who are not members of the Wilson Family or officers or employees of
IGC or ACPT or an entity affiliated with the Wilson Family.
IGC UNITS ELIGIBLE TO VOTE ON THE RESTRUCTURING.
The close of business on August 10, 1998 has been established as the Record
Date for determining IGC Unitholders entitled to notice of, and to vote at,
the special meeting of IGC Unitholders and at any adjournment thereof. On that
date, there were issued and outstanding 10,311,785 IGC Units. No matters other
than the Restructuring and certain procedural matters may be discussed or
voted upon at the special meeting of IGC Unitholders.
The presence, in person or by proxy, of IGC Unitholders holding more than
50% of the total number of outstanding IGC Units will constitute a quorum at
the special meeting of IGC Unitholders.
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If you beneficially own IGC Units issued to a broker or other nominee
holder, you must instruct such broker or nominee holder how to vote the IGC
Units that you beneficially own. If you do not give such instructions, the
broker or other nominee holder will not vote your IGC Units. Failure to vote
any IGC Units on the Restructuring will have the same effect as voting against
the proposal because its approval requires a majority of the outstanding IGC
Units eligible to vote in its favor.
REQUIRED VOTE.
The Board of Directors of IGMC unanimously recommends a vote for the
Restructuring. For the Restructuring to take effect, more than 50% of the
total number of outstanding IGC Units eligible to be voted must vote in favor
of the Restructuring at the special meeting. In addition, the Restructuring
must be approved by a majority of the IGC Units present, in person or by
proxy, and voted at the meeting that are not beneficially owned by the Wilson
Family. The Wilson Family beneficially owns more than a majority of the
outstanding IGC Units.
Only record holders are entitled to vote. If you are only the beneficial
owner of IGC Units and you do not hold the IGC Units of record, you must
instruct the record holder of your IGC Units how to vote your IGC Units. You
will have one vote for each IGC Unit you hold. If you vote against the
Restructuring, you will not possess any appraisal rights with respect to your
IGC Units. See "The Restructuring--No Dissenters' Appraisal Rights."
BROKER NON-VOTES AND ABSTENTIONS.
Under the rules of the American Stock Exchange, brokers holding IGC Units on
behalf of their clients may not vote the respective IGC Units on whether to
approve the Restructuring without their clients' authorization. A broker
therefore will not vote any IGC Units on whether to approve the Restructuring
without receiving instructions on how to vote from such broker's client.
Accordingly, there will be no broker non-votes to consider at the special
meeting.
With respect to the Restructuring, abstentions will have the same effect as
a vote against approval because more than 50% of the total number of
outstanding eligible IGC Units must approve the Restructuring, rather than
just a majority of those eligible IGC Units present at the special meeting.
PROXIES.
Proxyholders will vote the eligible IGC units represented by valid proxies
at the special meeting in accordance with the directions given on the Proxy
Card concerning whether to approve the Restructuring. Moreover, the
proxyholders intend to vote such IGC Units on any procedural matters coming
before the special meeting in accordance with their best judgment. Proxies
voted in favor of approval of the Restructuring, or proxies as to which no
voting instructions are given, will be voted to adjourn or postpone the
special meeting, if necessary in order to solicit additional proxies in favor
of approval of the Restructuring. IGC does not currently intend to seek an
adjournment or postponement of its special meeting.
Unless indicated to the contrary thereon, the directions you give on a Proxy
Card will be for all of your eligible IGC Units.
IF YOU SIGN AND RETURN A PROXY CARD WITHOUT GIVING ANY DIRECTIONS ON HOW TO
VOTE ON THE RESTRUCTURING, THE PROXYHOLDER WILL VOTE YOUR ELIGIBLE IGC UNITS
FOR THE APPROVAL OF THE RESTRUCTURING.
REVOCATION OF PROXIES.
You may revoke your proxy at any time prior to the proxyholder's voting of
the IGC Units to which such proxy applies by: (i) submitting a later dated
Proxy Card to the IGC Management proxyholders or someone else
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who attends the special meeting; (ii) attending the special meeting and
delivering a written notice of revocation of the proxy to the representatives
of IGC Management present at the special meeting; or (iii) delivering a
written notice stating that you wish to revoke your proxy to IGC Management at
222 Smallwood Village Drive, St. Charles, MD 20602, Attention: Edwin L. Kelly,
Secretary, which the Secretary receives before the date of the special
meeting.
SOLICITATIONS BY IGC MANAGEMENT.
IGC Management, officers and employees of IGC, and directors of IGMC may
solicit proxies in favor of the Restructuring by mail, personal interview,
telephone, facsimile transmission or other means. They will receive no
additional compensation therefor, but will be reimbursed for any expenses
incurred in connection therewith.
NO DISSENTERS' APPRAISAL RIGHTS.
IGC Unitholders who object to the Restructuring will have no dissenters'
appraisal rights (i.e., the right, instead of receiving Common Shares, to seek
a judicial determination of the "fair value" of their IGC Units and to compel
IGC to purchase IGC Units for cash in that amount) under state law or the
Partnership Agreement, nor will such rights be voluntarily accorded to the IGC
Unitholders, and objecting IGC Unitholders will have no alternative to receipt
of Common Shares in the Restructuring other than selling their IGC Units in
the market. The IGC Units are currently listed on the AMEX and the PSE under
the ticker symbol "IGC."
THE RESTRUCTURING
REASONS FOR THE RESTRUCTURING.
The purpose of the Restructuring is to create an attractive investment
vehicle that will not be burdened with the operating losses and capital needs
of AFH, IWT and CWT and will not be a party to IGC's wetlands litigation. In
addition, ACPT, whose principal income is dividends from corporations, should
be a more attractive investment for pension funds and mutual funds than is IGC
as a master limited partnership. Tax reporting for Shareholders will be
simplified compared to that of IGC Unitholders. Management expects that ACPT
will have greater access to capital markets than IGC has had. However,
completion of the Restructuring may result in certain adverse consequences to
holders of Common Shares, including a reduction in mandatory distributions
compared to that of IGC, recognition by IBC of an estimated $6.1 million of
taxable gain in connection with certain of the Asset Transfers, and
limitations on ownership of Common Shares. See "--Principal Advantages of the
Restructuring;--Principal Disadvantages of the Restructuring."
THE ASSET TRANSFERS.
ACPT will act as a self-managed holding company and following the Asset
Transfers will own all of the outstanding equity interests in American Land,
American Management and IGP Group and all of the common stock of American
Rental. Through the Asset Transfers, IGC will transfer its principal real
estate operations and assets to ACPT and these subsidiary entities. IGC
intends to defer the transfer of its general partnership interest in nine
apartment partnerships until after the Distribution in order to obtain limited
partner consents or to avoid triggering a tax termination under the Code. IGC
intends to obtain such limited partner consent as soon as practicable after
the Distribution. See "Transactions with Related Parties--Staggered Transfer
of Partnership Interests to American Housing."
American Rental.
American Rental will acquire IGC's partnership interests in United States
investment apartment properties and its land in the United States presently
intended for development as apartment properties. The partnership interests in
13 investment apartment properties ("U.S. Apartment Partnerships") will be
held by American Rental indirectly through American Housing, in which American
Rental will have a 99% limited partner interest.
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American Housing Management Company, a wholly owned subsidiary of American
Rental, will have a 1% general partner interest. See "Business and Properties
of ACPT--Rental Apartment Properties--United States" for a description of the
United States apartment properties. American Rental is expected to be taxed as
a REIT. In order to maintain its REIT qualification, American Rental will
issue preferred shares to 320 employees of American Management which in the
aggregate will represent a liquidation value of $200,000 and provide for a 10%
cumulative preferred dividend.
American Management.
American Management, which currently is a wholly-owned subsidiary of IGC, in
December 1997 acquired IGC's United States property management operations
which provide management services for the United States apartment properties
and for other rental apartments not owned by IGC. Prior to the formation of
American Management, such operations were conducted directly by IGC. IGC will
transfer all of the outstanding stock of American Management to ACPT prior to
the Distribution. American Management is a Delaware corporation and will be
taxed as a corporation.
American Land.
American Land will acquire IGC's principal United States property assets.
These will include the following:
1) IGC's 100% interest in St. Charles Community LLC which will hold
approximately 4500 acres of land in St. Charles, Maryland. This constitutes
substantially all of the land formerly held by St. Charles Associates, a
partnership in which IGC holds a 99% partnership interest and IBC holds a
1% partnership interest, except for a 50% interest in Brandywine Investment
Associates L.P., which holds 277 acres of land held for development in
Brandywine, Maryland, that will continue to be held by St. Charles
Associates. IGC also will retain land in Pomfret, Maryland, the Westbury
land, the Wetlands Properties, and 26 residential lots in the Dorchester
neighborhood in St. Charles. See "Business and Properties of ACPT--
Community Development".
2) IGC's 41.0346% interest in Maryland Cable Limited Partnership
("Maryland Cable"), which in 1988 sold all of its cable television system
assets in St. Charles. Pursuant to the sales agreement for the cable
assets, Maryland Cable is entitled to receive, until January 2000, a fee
for each residential unit built in St. Charles that becomes available for
installation of cable television. In addition, St. Charles Associates,
which under the sales agreement is entitled to a separate fee for each unit
that becomes available for cable installation, will assign such rights
directly to St. Charles Community LLC.
3) The Class B IGP Interest that represents IGP's rights to income, gains
and losses associated with land in Puerto Rico held by LDA and designated
for development as saleable property.
4) IGC conditionally has agreed to transfer to American Land the 14 acre
Commercial Parcel in St. Charles if and when IGC settles the wetlands
litigation on terms approved by the Board of Directors of IGMC, provided
that IGC shall have received confirmation that the transfer of the
Commercial Parcel (and resulting decrease in the value of IGC's assets)
will not cause the IGC Units to be delisted from AMEX or the PSE. The
Commercial Parcel has an appraised gross retail value as of December 31,
1996 of $4,214,000. If IGC is unable to settle the wetlands litigation on
satisfactory terms or IGC does not receive confirmation of the continued
listing of IGC Units, IGC also will retain the Commercial Parcel.
American Land is a Maryland corporation and will be taxed as a
corporation.
IGP Group.
IGP Group will acquire the Class A Interest in IGP, which represents IGC's
entire 99% limited partnership interest and 1% general partnership interest in
IGP other than the Class B Interest to be held by American Land. Prior to the
Restructuring, James J. Wilson, who currently is a general partner, without a
percentage interest, of IGP and is entitled to preferential cash distributions
and allocations of certain tax items from the partnerships in which IGP holds
interests, will transfer his interest in IGP to a subsidiary of ACPT. As a
result, ACPT, through
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American Land and IGP Group, will own indirectly 100% of IGP. IGP Group
intends to qualify as a Puerto Rico special pass-through entity for Puerto
Rico tax purposes and is expected to be taxed as a corporation for U.S. tax
purposes. IGP's assets and operations will include:
1) LDA, a Puerto Rico special partnership owned 99% by IGP and 1% by
IGP's wholly-owned subsidiary LDA Group LLC, which holds approximately 312
acres of land in the planned community of Parque Escorial and 543 acres in
Canovanas, Puerto Rico, presently being held for future development;
2) a 50% partnership interest in Escorial Builders Associates S.E.
("Escorial Builders"), which is engaged in the construction of condominiums
in the planned community of Parque Escorial;
3) a 1% interest in El Monte Properties S.E., a Puerto Rico special
partnership which owns El Monte Mall Complex, a 169,000 square foot office
and retail complex in San Juan, Puerto Rico;
4) general partner interests in 9 Puerto Rico apartment partnerships (the
"Puerto Rico Apartment Partnerships"). See "Business and Properties of
ACPT--Rental Apartment Properties--Puerto Rico"; and
5) general partner interests in 2 Puerto Rico apartment partnerships
under condominium conversion (the "Puerto Rico Apartment Partnerships Under
Condominium Conversion"). See "Business and Properties of ACPT--Condominium
Conversion."
THE DISTRIBUTION.
In connection with the Asset Transfers, ACPT will issue to IGC sufficient
Common Shares to enable IGC to make the Distribution. In the Distribution, IGC
will distribute all Common Shares held by it to the IGC Unitholders and its
general partners--IGMC and IBC--pro rata in accordance with each partner's
percentage interest in IGC. The aggregate of approximately 5,200,000 Common
Shares distributed to IGC Unitholders will equal 99% of the Common Shares
outstanding immediately following the Distribution, corresponding to the IGC
Unitholders' aggregate 99% partnership interest in IGC. Common Shares
representing the remaining 1% of such Common Shares will be distributed to
IGMC and IBC in accordance with their respective 1/3% and 2/3% partnership
interests in IGC, with IGMC receiving approximately 17,500 Common Shares and
IBC receiving approximately 34,500 Common Shares.
IGC will effect the Distribution as soon as practicable following approval
of the Restructuring (such date, the "Distribution Date") by delivering all
outstanding Common Shares to Registrar and Transfer Company (the "Distribution
Agent") for distribution to those persons who are holders of record of IGC
Units as of the close of business on the Record Date. The Distribution will be
made on the basis of one ACPT Common Share for every two IGC Units outstanding
on the Record Date. The actual total number of Common Shares to be distributed
will depend on the number of IGC Units outstanding on the Record Date. Based
upon IGC Units outstanding as of the Record Date, approximately 5,250,000
Common Shares will be distributed to holders of IGC Units.
No certificates or scrip representing fractional Common Shares will be
issued to IGC Unitholders as part of the Distribution. The Distribution Agent
will aggregate fractional Common Shares into whole Common Shares and sell them
in the open market at then prevailing prices on behalf of IGC Unitholders who
otherwise would be entitled to receive fractional Common Share interests, and
such persons will receive a check in payment for the amount of their allocable
share of the total sale proceeds. Such sales are expected to be made as soon
as practicable after the distribution of Common Share certificates to IGC
Unitholders.
Holders of IGC Units on the Record Date will not be required to pay cash or
other consideration, to surrender or exchange certificates representing IGC
Units or to take any other action in order to receive Common Shares pursuant
to the Distribution. All holders of IGC Units will continue to hold their IGC
Units and, if such holders are holders of record on the Record Date, they will
also receive Common Shares. The Distribution will not otherwise change the
number of, or the rights associated with, the outstanding IGC Units.
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RELATIONSHIP BETWEEN IGC AND ACPT AFTER THE DISTRIBUTION.
No Overlapping Management.
Following completion of the Distribution, IGMC will remain the managing
general partner of IGC and no changes will be made to the Partnership
Agreement of IGC. No Trustee, officer or employee of ACPT (except Mr. Blakeman
until his successor can be recruited) will also be a director or officer of
IGMC or officer or employee of IGC. However, certain Trustees of ACPT will be
Trustees of the CWT Trust.
Banc One Financing.
On September 19, 1997, IGC refinanced substantially all of its U.S. land
development recourse indebtedness pursuant to a Master Loan Agreement dated
August 1, 1997 by and among IGC, ACPT, St. Charles Community LLC and Banc One
Capital Partners IV, Ltd. ("Banc One"). To date approximately $14 million in
proceeds of this $20 million facility were used as follows: $6.8 million to
satisfy existing indebtedness to NationsBank, $1.7 million to Puerto Rico
income taxes, $2.5 million for various accounts payable, and $3 million to pay
in full the wetlands fine. In addition, the Banc One facility provides for up
to $4 million in community development financing for Fairway Village, and $2
million for payment of IGC's wetlands remediation expenses.
The loan bears interest at prime plus 2.5% and requires semi-annual
principal payments of $1 million during the first year and $1.5 million
thereafter until maturity at the end of the seventh year. The loan is secured
by substantially all of IGC's assets, excluding (with the exception of one 14
acre parcel of land in St. Charles) the assets that will remain in IGC
following the Restructuring. During the first 3 years of the loan Banc One is
generally entitled to receive 50% of the net sales proceeds of any collateral
as a mandatory principal curtailment with the percentages increasing to 60% in
years 4 and 5, 70% in year 6, and 80% in year 7.
In connection with the loan, IGC granted Banc One an option to purchase
150,000 IGC Units at an exercise price of $3.0016 per unit (the "Strike
Price"). During any year that the loan remains outstanding, IGC is required to
grant Banc One 75,000 additional options with an exercise price equal to the
lesser of the Strike Price or the market price on the date of grant. The loan
with Banc One requires additional interest payments on each annual anniversary
date. The amount due is 1% of the outstanding balance in 1998 and 1999, and
increases 1/2% each year thereafter, through 2003.
Following the Restructuring, and upon approval of Banc One, ACPT will assume
the obligation to grant options. IGC will remain liable to Banc One for
outstanding indebtedness but will be released from its other covenant
obligations. Pursuant to the Restructuring Agreement, ACPT will indemnify and
hold harmless IGC from any liability under the Banc One loan.
NationsBank Letter of Credit.
NationsBank has issued in the name of IGC a standby letter of credit in the
face amount of $4.2 million which serves as collateral for municipal bonds in
the principal amount of $4.2 million issued by a District of Columbia agency
that financed the Chastleton Apartments. IGC's obligations under the letter of
credit are secured by an assignment of certain notes payable by Brandywine
Investment Associates L.P. and by IGP's partnership interests in three Puerto
Rico Apartment Partnerships. Additional collateral has been provided by IBC
and IBC has undertaken to replace the NationsBank letter of credit with a
letter of credit secured only by assets of IBC.
ASSETS RETAINED BY IGC.
After the Restructuring, IGC will continue to own certain assets that in
management's view do not fit ACPT's business plan. These include the Wetlands
Properties, 25 residential lots in the Dorchester neighborhood in St. Charles,
certain parcels of land in Pomfret, Maryland, the Westbury community in St.
Mary's County, Maryland, a 50% interest in Brandywine Investment Associates
L.P., which owns land in Brandywine, Maryland,
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all of the shares of AFH, the LDA Note, as well as fractional interests in
Chastleton and Coachman's L.P. (collectively the "Retained Assets"). As part
of the Asset Transfers, IGC conditionally has agreed to transfer to American
Land the 14 acre Commercial Parcel in St. Charles if and when IGC settles the
wetlands litigation on terms approved by the Board of Directors of IGMC,
provided that IGC shall have received confirmation that the transfer of the
Commercial Parcel (and resulting decrease in the value of IGC's assets) will
not cause the IGC Units to be delisted from AMEX or the PSE. The Commercial
Parcel has an appraised gross retail value as of December 31, 1996 of
$4,214,000. If IGC is unable to settle the wetlands litigation on satisfactory
terms or IGC does not receive confirmation of the continued listing of IGC
Units, IGC also will retain the Commercial Parcel. Substantially all of the
stock of IWT and CWT (excluding shares issued as incentive compensation) will
be held in the CWT Trust for the benefit of IGC Unitholders. Prior to
contributing IWT and CWT stock to the CWT Trust, IGC will capitalize these
entities with $1 million in cash, certain residential lots in the Montclair
development, and a note in the amount of $1.06 million. As a result of the
wetlands conviction, the Wetlands Properties were encumbered by an obligation
to impose a conservation easement that would prohibit development. This
easement was never recorded and the wetlands conviction was reversed. However,
the matter has been remanded for a new trial and as a practical matter the
Wetland Properties remain undevelopable until the wetlands litigation is fully
resolved. See "IGC After the Restructuring--Description of IGC's Continuing
Business."
APPROVALS REQUIRED TO EFFECT THE RESTRUCTURING.
In addition to obtaining approval of the IGC Unitholders, the consummation
of the Restructuring is subject to obtaining approvals of certain government
entities, including HUD, certain of IGC's lenders, including Banc One, and
certain of the limited partner investors in the U.S. Apartment Partnerships.
Management of IGC expects to obtain all necessary approvals in a timely
manner. However there can be no assurance that such approvals will be obtained
on terms and conditions acceptable to IGC.
BACKGROUND OF THE RESTRUCTURING; CONSIDERATION OF ALTERNATIVES.
Disadvantages of Current Structure.
Though IGC's limited partnership structure yields significant tax
advantages, certain disadvantages of the structure have increasingly affected
the attractiveness of IGC as an investment vehicle. In developing plans for
the Restructuring, IGC management has sought to minimize disadvantages of the
current structure while preserving many of the tax advantages.
A significant disadvantage of the partnership structure is its complexity.
For example, IGC is managed by its managing general partner, IGMC, but also
has another general partner, IBC, which was necessary initially to establish
IGC as a partnership for federal income tax purposes. Also for partnership tax
reasons, IGC's principal subsidiaries, SCA and IGP, are not wholly owned by
IGC.
As a partnership, IGC also has limited appeal to certain tax-exempt
investors, such as pension funds and many mutual funds. These entities
generally do not invest in limited partnerships because allocations to such
investors of a partnership's active trade or business income are not tax-
exempt. Such tax-exempt investors favor investments in securities that
generate only passive income such as dividends.
In addition, with the expiration on December 31, 1997 of a ten-year
transition period established by the Omnibus Budget Reconciliation Act of
1987, certain current sources of IGC income (principally management fees) will
no longer be qualifying income for a publicly traded partnership. Thus to
remain classified as a partnership, IGC management recognized the need to
restructure certain of its investments whether or not the Restructuring takes
place.
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Alternatives Considered.
The structural disadvantages coupled with the 1996 conviction and sentencing
in the wetlands litigation led IGC management to begin examining various
restructuring alternatives.
During the Fall of 1996, IGC management consulted with Covington & Burling
and Arthur Andersen LLP and identified the REIT as a possible investment
vehicle.
In December 1996, IGC management announced that it had determined to pursue
development and implementation of a plan to restructure the publicly traded
partnership by placing IGC's multifamily housing assets into a publicly traded
REIT and disposing of land development assets to Wilson Family entities. On
December 17, 1996, the IGMC Board of Directors unanimously approved a
resolution to proceed with implementing a REIT restructuring plan. The
Directors present at the meeting were James J. Wilson, Donald G. Blakeman,
Jorge Colon-Nevares, Joel H. Cowan, Edwin L. Kelly, Thomas B. Wilson, J.
Michael Wilson, and John E. Hans. With the land transfers the Wilson Family
would receive a reduced ownership in the REIT. The announcement explained that
the plan would be considered by a special committee consisting of members of
the IGMC Board of Directors who are neither members of the Wilson Family nor
employees of IGC and that it would be subject to satisfactory resolution of
various U.S. and Puerto Rico tax and legal issues.
During the first quarter of 1997 the special committee and certain
Unitholders expressed concern that it might be difficult to establish a fair
value for assets that would be transferred to Wilson Family entities in
exchange for diminished ownership of the REIT. Also, Puerto Rico tax
considerations dictated dividing IGC's multifamily housing assets between
separate U.S. and Puerto Rico REITs. As a result, the committee expressed
concern that two REITs would lack sufficient assets and income to create a
strong trading market for their securities. Accordingly, the special committee
directed IGC management to develop an alternative plan.
In April 1997, after consideration by the special committee, IGC management
announced a modified plan to convert IGC into an entity that would benefit
from rules that govern REITs. The IGMC Board of Directors met on April 9,
1997, and unanimously agreed to proceed with the modified REIT restructuring
plan, subject to review by a committee consisting of Joel Cowan, Jorge Colon-
Nevares, Michael Wilson, and Edwin L. Kelly. The Directors present at the
meeting were James J. Wilson, Donald G. Blakeman, Jorge Colon-Nevares, Joel H.
Cowan, Edwin L. Kelly, Thomas B. Wilson, J. Michael Wilson, and Francisco
Arrivi. The proposed entity would have been similar to the current proposal
for ACPT, except that only AFH, CWT, IWT and the Wetlands Properties would
have been excluded. However, the proposed entity would retain a right to
receive shares of CWT and/or IWT as soon as either or both contracted to begin
a solid waste disposal facility and an option to purchase the Wetlands
Properties at book value if the wetlands litigation were favorably resolved.
The modified plan also contemplated the possibility of making an offer to
the limited partners in the Apartment Partnerships to exchange their
partnership interests for interests in a U.S. or Puerto Rico partnership that
would hold the apartment properties (the "Exchange Offer"). During the first
six months of 1997, IGC management discussed this possibility with the limited
partners' representatives. The plan seemed feasible only if the U.S. and
Puerto Rico partnership interests were convertible into a liquid security that
was more attractive than IGC Units.
On May 8, 1997, IGC retained Stanger to assist in refining the structure and
providing opinions regarding the fairness of the Exchange Offer and asset
transfers. In June 1997, Stanger provided IGC a draft report in which it
proposed that IGC not be converted into ACPT with rights to AFH, CWT, IWT and
the Wetlands Properties. Stanger instead recommended that management examine
the possibility of IGC continuing as a separate publicly traded partnership
with AFH, CWT, IWT and the Wetlands Properties, while creating and
distributing to its Unitholders shares of ACPT.
During the third quarter of 1997, IGC management and the special committee
evaluated Stanger's recommendation and determined that IGC may require more
than AFH, CWT, IWT and the Wetlands Properties to remain a viable publicly
traded company. At the same time, in connection with the Banc One financing,
IGC
50
<PAGE>
initiated the Restructuring by organizing ACPT and separating ownership of the
Wetlands Properties and other land development assets into two limited
liability companies owned by IGC and ACPT, respectively. The IGMC Board of
Directors met on June 19, 1997, and unanimously approved resolutions
authorizing IGC to begin preparing the disclosure documents related to the
proposed Restructuring. The Directors present at the meeting were James J.
Wilson, Donald G. Blakeman, Jorge Colon-Nevares, Joel H. Cowan, Edwin L.
Kelly, Thomas B. Wilson, J. Michael Wilson, and Francisco Arrivi.
Also during the third quarter, IGC management began preparing this Proxy
Statement/Prospectus. The IGMC Board of Directors met on August 13, 1997. At
that meeting, the Directors discussed the status of the Proxy
Statement/Prospectus. The Directors present at the meeting were James J.
Wilson, Donald G. Blakeman, Jorge Colon-Nevares, Joel H. Cowan, Edwin L.
Kelly, Thomas B. Wilson, J. Michael Wilson, and Francisco Arrivi. Attorneys
from Covington & Burling also were present. On August 15, 1997, IGC announced
that it intended to file with the Commission in September documents describing
the ACPT Distribution. Postponement of the Banc One financing and resolution
of the treatment of certain tax, legal and accounting issues delayed
completion of the initial filing until November 14, 1997.
On November 14, 1997, IGC filed with the Commission preliminary proxy
materials relating to the Restructuring (the "November Filing"). In addition
to seeking approval of the Distribution, the November Filing proposed to seek
approval of IGC Unitholders to liquidate IGC in the event that, as a result of
the Restructuring, IGC Units would be delisted from either the AMEX or PSE. On
December 24, 1997 IGC received a letter from the staff of the Commission's
Division of Corporation Finance commenting on the November Filing. The staff
expressed the view that the Restructuring would constitute a "going private"
transaction unless assurances could be obtained that IGC Units would remain
listed on AMEX and PSE following the Restructuring.
On December 23, 1997 the United States Court of Appeals for the Fourth
Circuit reversed the wetlands convictions of IGC, SCA and James J. Wilson and
remanded the matter for a new trial.
During January 1998, a syndicator of limited partnership interests in 10 of
the 22 U.S. and Puerto Rico Apartment Partnerships evaluated the proposed
Restructuring and opined to IGC that the Exchange Offer likely would not be
attractive to a majority of the holders of limited partnership interests in
these partnerships. Accordingly, IGC management determined to discontinue
plans for the Exchange Offer.
Also in January 1998, Jorge Colon-Nevares resigned as a director of IGMC and
was replaced by Thomas Shafer. Mr. Colon-Nevares was one of the members of the
special committee that had been evaluating the Restructuring. With Mr. Shafer
joining, the IGMC Board established a new special committee comprised of
Messrs. Blakeman, Cowan, and Shafer to reevaluate the terms of the
Restructuring. The committee retained independent legal counsel and met three
times during February and March 1998.
IGC management proposed a reallocation of certain assets between IGC and
ACPT to enhance the prospects for continued listing of IGC Units on the AMEX
and PSE and to provide greater capital resources for the waste technology
business. The committee examined the management's projected pro forma earnings
and cash flows for ACPT and IGC following the Distribution. Stanger also
reviewed the projected pro forma financial statements. The committee obtained
a commitment of IBC to advance funds to IGC, if needed, to pay wetlands
defense costs.
On March 31, 1998 AMEX advised IGC that based on its review of the projected
pro forma financial statements of IGC, IGC management should expect that the
IGC Units would remain listed following the Distribution. See "The
Restructuring--Background of the Restructuring; Consideration of
Alternatives."
Mr. Cowan resigned as a director effective June 4, 1998.
On July 7, 1998 the Board adopted resolutions formally approving the
Restructuring and recommending that the Unitholders approve the Restructuring.
51
<PAGE>
THE PRIVATE OFFERING.
ACPT has engaged investment bankers to advise and assist in possible
financing activities to be commenced after the completion of the
Restructuring. In connection with the Restructuring, subject to market
conditions, ACPT will seek to raise up to $35 million in additional equity
capital through the Private Offering of Preferred Shares. Proceeds from the
Private Offering would be used to pay down existing bank debt and for working
capital. The terms of the Preferred Shares will be negotiated with purchasers,
but they may include rights to preferred distributions, cumulative
distributions, and/or liquidation preferences. The Preferred Shares also may
be convertible into Common Shares at a negotiated conversion ratio. The
Private Offering, if completed, would result in dilution of the percentage
interest of all ACPT shareholders including the Wilson Family, whose
percentage ownership would likely be reduced below 40%. See "Income Tax
Considerations--Federal Income Tax Considerations--Federal Income Tax
Classification of American Rental--Share Ownership, Reporting."
PRINCIPAL ADVANTAGES OF THE RESTRUCTURING.
Broader Market for Common Shares than for IGC Units.
Limited partnership interests which require holders to recognize trade or
business income and losses from partnership operations are generally not
regarded as attractive investments for institutions such as mutual funds and
pension funds. ACPT, as a holding company, will receive income principally in
the form of dividends and distributions from its subsidiaries, and its Common
Shares should be a more attractive investment for certain investors than IGC
Units even though ACPT is expected to be treated as a partnership for federal
income tax purposes. Enlarging the group of potential investors for ACPT
Common Shares should produce a more liquid market than currently exists for
IGC Units. However, there is no assurance that a public market will develop or
be substantial.
No History of Wetlands Litigation.
IGC, which was convicted of federal Clean Water Act violations (which
conviction was reversed but has been remanded for a new trial), will retain
the four parcels of land that were involved in that litigation and the one
additional parcel that was the subject of a civil suit that was dismissed
without prejudice (collectively, the "Wetlands Properties"). None of the land
to be transferred to ACPT was so implicated and ACPT is not a party to such
proceedings. See "Legal Proceedings--IGC" and "IGC After the Restructuring--
Creditors Rights."
No Adverse Financial Effects from AFH, IWT and CWT.
AFH has had operating losses and has capital needs and IWT and CWT have
capital needs that have had adverse effects upon IGC's operating results and
financial condition. These are expected to continue for the foreseeable
future. AFH will remain a subsidiary of IGC, and IWT and CWT will be held by
the CWT Trust for the benefit of IGC Unitholders. Thus, their financial
results will not affect ACPT. See "The Restructuring--Assets Retained by IGC."
ACPT will have no obligation to provide financial support to AFH, IWT or CWT.
See "IGC After the Restructuring--Description of IGC's Continuing Business."
Simplified Tax Reporting.
Because ACPT will derive income principally from dividends from
corporations, the items to be reported for federal tax purposes by ACPT
Shareholders generally will be limited to dividends and credits for
withholding taxes paid by IGP Group in Puerto Rico. Shareholders will not have
to report ordinary income or losses from trade or business activity as is
currently the case with IGC. See "Income Tax Considerations--Federal Income
Tax Considerations--Federal Income Tax Classification of ACPT."
Enhanced Financing Opportunities.
The removal of the adverse financial effects of AFH, IWT, and CWT and the
absence of involvement in the wetlands litigation should provide ACPT with
opportunities to obtain financing for its operations from banks
52
<PAGE>
and other lenders on terms that generally are more favorable than those
currently available to IGC. ACPT has not obtained any financing independent of
IGC. However, ACPT has engaged investment bankers to advise and assist in
possible financing activities to be commenced after the completion of the
Restructuring.
Election of Trustees by Shareholders.
ACPT will be managed by its Board of Trustees, the members of which will be
elected by ACPT shareholders. ACPT also will hold annual meetings of
shareholders. See "Comparative Rights of IGC Unitholders and Shareholders."
PRINCIPAL DISADVANTAGES OF THE RESTRUCTURING.
No Cash Distributions to IGC Unitholders.
Unless IGC ultimately prevails in the wetlands litigation, or the CWT Trust
sells assets and remits proceeds to IGC, the operations and assets remaining
with IGC after the Restructuring may not enable IGC to make quarterly
distributions to the IGC Unitholders. See "IGC After the Restructuring--
Description of IGC's Continuing Business." It is possible that IGC may
recognize taxable income without generating sufficient cash to enable IGC to
make a distribution to the IGC Unitholders in an amount at least equal to the
IGC Unitholders' tax liability arising from their share of IGC taxable income.
Tax Liabilities.
Gain will be recognized by IGC (and the Unitholders will take into account
their allocable share of such gain) on the transfer of IGC's interests in the
U.S. Apartment Partnerships to American Housing to the extent that the amount
of liabilities assumed (or deemed assumed) by American Housing exceeds the tax
basis of the property contributed to American Housing. IGC has calculated that
approximately $6.1 million in gain will be recognized by IBC as a result of
the transfer, based on certain estimates and assumptions by IGC, including
IGC's estimates of tax basis and the amount of liabilities at the time of the
transfer. See "Income Tax Considerations--Federal Income Tax Considerations--
Federal Income Tax--Consequences of the Asset Transfers."
American Management and American Land will be treated as corporations for
federal and state tax purposes and will be subject to federal and state income
tax (including any applicable alternative minimum tax) on their taxable income
at regular corporate tax rates. Payment of such taxes may reduce the amounts
otherwise available for distribution to ACPT, or by ACPT to the Shareholders.
As a result of the Asset Transfers, Shareholders will not have a
distributive share of the various items of income, gain, loss, deduction or
credit attributable to the operating businesses conducted by partnerships.
Instead, distributions to ACPT from its subsidiaries American Management,
American Land, IGP Group and American Rental generally will be limited to
dividend income (to the extent of current and accumulated earnings and
profits), and, in the absence of earnings and profits, nontaxable return of
capital (to the extent of ACPT's tax basis in the stock of such corporation)
or taxable capital gain (after ACPT's tax basis has been reduced to zero).
Distributions from American Rental that are specifically designated as capital
gain dividends are treated as long term capital gains. Each Shareholder
generally will include its distributive share of ACPT's income in the
Shareholder's taxable income. In the event that American Rental elects to
retain all or a portion of its net capital gain and pay federal income tax on
such undistributed amounts, each Shareholder generally will include in income
its distributive share of the undistributed capital gains and will be deemed
to have paid its distributive share of the income tax paid by American Rental
with respect to such undistributed capital gains.
Reduction of Required Distributions.
Under its Partnership Agreement, IGC is required to distribute annually to
IGC Unitholders, in cash and/or property, an amount equal to 55% of the net
taxable income of IGC allocated to IGC Unitholders. The terms of
53
<PAGE>
ACPT's Declaration of Trust require ACPT to distribute annually to
Shareholders, in cash and/or property, an amount equal to 45% of the net
taxable income of ACPT allocated to Shareholders less the amount of taxes paid
by ACPT in Puerto Rico and other foreign countries and certain federal taxes
paid by American Rental with respect to undistributed capital gains.
As is the case with IGC, it is possible that ACPT may recognize taxable
income without generating sufficient cash to enable ACPT to make a
distribution to Shareholders in an amount at least equal to the Shareholders'
tax liability arising from their share of ACPT taxable income.
Antitakeover Effects.
The provisions of ACPT's Declaration of Trust on classification of the Board
of Trustees, restrictions on the ownership of Common Shares, the ability to
issue preferred stock, and certain control share acquisition and business
combination statutes applicable to ACPT could have the effect of delaying,
deferring or preventing a transaction or a change in control of ACPT that
might involve a premium price for holders of Common Shares or otherwise be in
their best interest.
Restrictions on Accumulation of Common Shares.
In order to preserve American Rental's qualification as a REIT, ACPT's
Declaration of Trust and Bylaws provide that a person (other than certain
existing IGC Unitholders) may not directly or indirectly own more than 2% of
the outstanding Common Shares. See "Income Tax Considerations--Federal Income
Tax Classification of American Rental."
ACPT PRO FORMA COMBINED FINANCIAL DATA
The unaudited Pro Forma Combined Financial Data of ACPT include the
consolidated accounts of its subsidiaries American Management, American Land,
IGP Group and American Rental and reflect the following transactions and
adjustments in the case of the Pro Forma Combined Statements of Operations for
the three months ended March 31, 1998 and for the fiscal year ended December
31, 1997 as if such transactions and adjustments had been completed January 1,
1997 and, in the case of the Pro Forma Combined Balance Sheet as of March 31,
1998, as if such transactions and adjustments occurred or such agreements were
in effect as of such date:
. Consummation of the distribution of the Common Shares of beneficial
interest of ACPT.
. The future receipt of mitigation draws under the Banc One loan.
. Increased general and administrative costs to operate ACPT on a stand-
alone basis.
The Pro Forma Combined Financial Data of ACPT are unaudited and presented
for informational purposes only and may not reflect ACPT's future results of
operations and financial position or what the results of operations and
financial position of ACPT would have been had such transactions occurred as
of the date indicated. Such pro forma information is based upon the combined
historical balance sheets and statements of operations of ACPP. ACPT's
unaudited Pro Forma Combined Financial Data and notes thereto should be read
in conjunction with ACPP's Combined Financial Historical Statements and notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contained elsewhere herein as well as the pro forma
financial statements of IGC which reflect the accounts of both IGC and ACPT
subsequent to the Restructuring and the Distribution.
54
<PAGE>
AMERICAN COMMUNITY PROPERTIES TRUST ("ACPT")
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ACPT RESTRUCTURE ACPT AFTER
HISTORICAL ADJUSTMENTS RESTRUCTURE
---------- ----------- -----------
<S> <C> <C> <C>
REVENUES
Community development--land sales........ $5,961 $ -- $5,961
Equity in earnings from partnerships and
developer fees.......................... 505 -- 505
Rental property revenues................. 2,209 -- 2,209
Management and other fees, substantially
all from related entities............... 976 -- 976
Interest and other income................ 137 -- 137
------ ----- ------
Total revenues......................... 9,788 -- 9,788
------ ----- ------
EXPENSES
Cost of land sales....................... 3,608 -- 3,608
Selling and marketing.................... 21 -- 21
General and administrative............... 1,600 10 (A) 1,610
Interest expense......................... 910 -- 910
Rental properties operating expense...... 896 -- 896
Depreciation and amortization............ 471 -- 471
Write-off of deferred project costs...... -- -- --
Spin-off costs........................... 757 -- 757
------ ----- ------
Total expenses......................... 8,263 10 8,273
------ ----- ------
INCOME BEFORE PROVISION FOR INCOME TAXES
AND MINORITY INTEREST..................... 1,525 (10) 1,515
PROVISION FOR INCOME TAXES................. 283 542 (B) 825
------ ----- ------
INCOME BEFORE MINORITY INTEREST............ 1,242 (552) 690
MINORITY INTEREST.......................... (241) -- (241)
------ ----- ------
NET INCOME................................. $1,001 $(552) $ 449
====== ===== ======
BASIC NET INCOME PER SHARE................. $ .09
======
WEIGHTED AVERAGE SHARES OUTSTANDING (C).... 5,218
======
</TABLE>
The accompanying notes are an integral part of this pro forma combined
statement of income.
55
<PAGE>
AMERICAN COMMUNITY PROPERTIES TRUST ("ACPT")
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ACPT RESTRUCTURE ACPT AFTER
HISTORICAL ADJUSTMENTS RESTRUCTURE
---------- ----------- -----------
<S> <C> <C> <C>
REVENUES
Community development--land sales....... $13,165 -- $13,165
Equity in earnings from partnerships and
developer fees......................... 1,509 -- 1,509
Rental property revenues................ 8,737 -- 8,737
Management and other fees, substantially
all from related entities.............. 3,775 -- 3,775
Interest and other income............... 943 -- 943
------- ------- -------
Total revenues........................ 28,129 -- 28,129
------- ------- -------
EXPENSES
Cost of land sales...................... 8,494 -- 8,494
Selling and marketing................... 127 -- 127
General and administrative.............. 6,607 130 (A) 6,737
Interest expense........................ 3,820 -- 3,820
Rental properties operating expense..... 3,597 -- 3,597
Depreciation and amortization........... 1,850 -- 1,850
Write-off of deferred project costs..... 6 -- 6
Spin-off costs.......................... 1,164 -- 1,164
------- ------- -------
Total expenses........................ 25,665 130 25,795
------- ------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES
AND MINORITY INTEREST.................... 2,464 (130) 2,334
PROVISION FOR INCOME TAXES................ 470 907 (B) 1,377
------- ------- -------
INCOME BEFORE MINORITY INTEREST........... 1,994 (1,037) 957
MINORITY INTEREST......................... (600) -- (600)
------- ------- -------
NET INCOME................................ $ 1,394 $(1,037) $ 357
======= ======= =======
BASIC NET INCOME PER SHARE................ $ .07
=======
WEIGHTED AVERAGE SHARES OUTSTANDING (C)... 5,196
=======
</TABLE>
The accompanying notes are an integral part of this pro forma combined
statement of income.
56
<PAGE>
AMERICAN COMMUNITY PROPERTIES TRUST ("ACPT")
PRO FORMA COMBINED BALANCE SHEET
AS OF MARCH 31, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
PRO FORMA PRO FORMA
ACPT RESTRUCTURE ACPT AFTER
HISTORICAL ADJUSTMENTS RESTRUCTURE
---------- ----------- -----------
<S> <C> <C> <C>
CASH AND CASH EQUIVALENTS
Unrestricted.............................. $ 2,126 $ -- $ 2,126
Restricted................................ 2,002 -- 2,002
-------- ----- --------
4,128 -- 4,128
-------- ----- --------
ASSETS RELATED TO RENTAL PROPERTIES
Operating properties, net................. 38,174 -- 38,174
Investment in unconsolidated rental
property partnerships.................... 7,015 -- 7,015
Other receivables, net.................... 665 -- 665
-------- ----- --------
45,854 -- 45,854
-------- ----- --------
ASSETS RELATED TO COMMUNITY DEVELOPMENT
Land and development costs
Puerto Rico............................. 32,202 -- 32,202
St. Charles, Maryland................... 22,437 -- 22,437
Notes receivable on lot sales and other,
substantially all due from affiliates.... 3,604 -- 3,604
-------- ----- --------
58,243 -- 58,243
-------- ----- --------
ASSETS RELATED TO HOMEBUILDING
Investment in joint venture................. 853 -- 853
-------- ----- --------
853 -- 853
-------- ----- --------
OTHER ASSETS
Receivables and other..................... 1,782 -- 1,782
Property, plant and equipment, net........ 423 -- 423
-------- ----- --------
2,205 -- 2,205
-------- ----- --------
TOTAL ASSETS.......................... $111,283 $ -- $111,283
======== ===== ========
</TABLE>
The accompanying notes are an integral part of this pro forma combined balance
sheet.
57
<PAGE>
AMERICAN COMMUNITY PROPERTIES TRUST ("ACPT")
PRO FORMA COMBINED BALANCE SHEET--(CONTINUED)
AS OF MARCH 31, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
LIABILITIES AND CAPITAL
PRO FORMA PRO FORMA
ACPT RESTRUCTURE ACPT AFTER
HISTORICAL ADJUSTMENTS RESTRUCTURE
---------- ----------- -----------
<S> <C> <C> <C>
LIABILITIES RELATED TO RENTAL PROPERTIES
Recourse debt........................... $ 918 $ -- $ 918
Non-recourse debt....................... 38,995 -- 38,995
Accounts payable and accrued
liabilities............................ 3,067 -- 3,067
-------- ------- --------
42,980 -- 42,980
-------- ------- --------
LIABILITIES RELATED TO COMMUNITY
DEVELOPMENT
Recourse debt........................... 34,128 -- 34,128
Non-recourse debt....................... 2,324 -- 2,324
Accounts payable, accrued liabilities
and deferred income.................... 4,444 -- 4,444
-------- ------- --------
40,896 -- 40,896
-------- ------- --------
OTHER LIABILITIES
Accounts payable and accrued
liabilities............................ 3,467 1,634 (D) 5,101
Notes payable and capital leases........ 145 -- 145
Accrued income tax liability-current.... 2,452 -- 2,452
Accrued income tax liability-deferred... 3,491 -- 3,491
-------- ------- --------
9,555 1,634 11,189
-------- ------- --------
TOTAL LIABILITIES......................... 93,431 1,634 95,065
-------- ------- --------
CAPITAL (E)............................... 17,852 (1,634)(D) 16,218
-------- ------- --------
TOTAL LIABILITIES AND CAPITAL....... $111,283 $ -- $111,283
======== ======= ========
</TABLE>
The accompanying notes are an integral part of this pro forma combined balance
sheet.
58
<PAGE>
AMERICAN COMMUNITY PROPERTIES TRUST ("ACPT")
NOTES TO PRO FORMA COMBINED FINANCIAL DATA
(A) Reflects the increase in general and administrative expenses to operate
ACPT on a stand-alone basis. Yearly general and administrative expense
increase consists of the following: executive salary, tax compliance
services and an annual shareholder meeting.
(B) Reflects provision for corporate level income taxes for American
Management and American Land. The income tax provision included in these
pro forma statements reflects the income tax provision and temporary
differences attributable to the operations of American Land and American
Management on a stand alone basis assuming combined federal and state tax
rates graduating from 22% to 45%. A deferred tax asset for American
Management and American Land exists and relates to SCA land and IGC land
as it did in connection with IGC's original organizational structure. The
deferred tax asset consists of three pieces. The first piece relates to
interest capitalized for tax purposes and expensed for book purposes that
will only be realized when the accompanying land is sold. The second piece
relates to deferred profit on IGC's books and will be realized as the
accompanying land is sold to a third party. The third piece relates to
IGC's investment in SCA and will be realized when the investment is sold.
The deferred tax asset has not been recorded in the accompanying pro forma
combined balance sheet as it has been reduced by a valuation allowance of
an equal amount.
(C) The pro forma weighted average number of shares outstanding was determined
by dividing IGC's weighted average Units outstanding by the Unitholders'
percent ownership, 99%, and dividing the result by two.
(D) Reflects total future mitigation draws available to IGC under the Banc One
loan. ACPT will assume the repayment responsibility for the amounts drawn
by IGC for remediation purposes.
(E) Capital account consists of investment in and advances from parent.
59
<PAGE>
ACPT
ACPT was formed under the Maryland Trust Law as a real estate investment
trust but is expected to be taxed as a partnership. The provisions of the
Maryland Trust Law require at least 75% of the value of ACPT's assets to be
held, directly or indirectly, in real estate assets, mortgages or mortgage-
related securities, government securities, cash and cash equivalent items,
including high-grade short term securities and receivables. ACPT was organized
on March 17, 1997, to carry out the Restructuring and, if the Restructuring is
completed, will continue in effect perpetually unless dissolved by action of
the Shareholders. ACPT will be wholly-owned by IGC until completion of the
Distribution. Following the completion of the Restructuring, ACPT will be
engaged in four principal lines of business formerly conducted by IGC: (i)
ownership of rental apartment properties in the United States and Puerto Rico,
(ii) community development in the United States and Puerto Rico, (iii)
property management services in the United States and Puerto Rico, and (iv)
development of commercial rental properties and/or ground leases in Puerto
Rico. In addition, ACPT will be engaged in limited condominium building
operations in Puerto Rico.
The mailing address of ACPT is 222 Smallwood Village Center, St. Charles,
Maryland 20602 and its telephone number is (301) 843-8600.
DISTRIBUTION POLICY
Under the terms of its Declaration of Trust, ACPT is required to make
minimum annual distributions to Shareholders such that the minimum aggregate
amount of all distributions made each year will equal 45% of the net taxable
income allocated to Shareholders in such year, provided that the amount of the
required minimum distribution will be reduced by the amount of taxes paid by
ACPT in Puerto Rico and other foreign countries and certain federal taxes paid
by American Rental with respect to undistributed capital gains. The minimum
distribution may consist of cash dividends and/or distributions of other
property. Any distributions in addition to the required minimum distribution
will be made at the discretion of the Board of Trustees. In making such
determinations, the Board of Trustees will take into account various factors,
including ACPT's anticipated needs for cash for future expansion and
development, current and anticipated expenses, obligations and contingencies,
and other similar working capital considerations.
ACPT and its subsidiaries expect to coordinate the declaration and payment
of dividends and other distributions from such entities in such a manner that
all dividends will be paid by the lower tier entities to ACPT on the same day
that ACPT declares a distribution to Shareholders of record on such date.
Thus, each Shareholder's distribution from ACPT will correspond with its
allocable share of taxable income associated with ACPT's receipt of dividends
from the other entities. See "Income Tax Considerations--Federal Income Tax
Considerations--Federal Income Taxation of ACPT and Shareholders--Coordination
of Allocations and Distributions."
60
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of ACPT as of March 31,
1998, and pro forma capitalization as of March 31, 1998, after giving effect
to the transactions described in the "ACPT Pro Forma Combined Financial Data."
The capitalization of ACPT should be read in conjunction with ACPP's Combined
Historical Financial Statements and the notes thereto, the "ACPT Pro Forma
Combined Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," each contained elsewhere
herein.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
------------------------
ACTUAL PRO FORMA(1)
---------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Recourse debt....................................... $ 35,191 $ 35,191
Non-recourse debt................................... 41,319 41,319
Capital(2).......................................... 17,852 16,218
---------- ----------
Total capitalization.............................. $ 94,362 $ 92,728
========== ==========
</TABLE>
- --------
(1) Pro forma for (i) the consummation of the Distribution, (ii) the receipt
of mitigation draws under the Banc One loan and (iii) increased general
and administrative costs to operate ACPT on a stand-alone basis. See "ACPT
Pro Forma Combined Financial Data."
(2) Capital consists of investment in and advances from parent.
61
<PAGE>
MARKET PRICES AND DISTRIBUTIONS
At the date hereof, there is no public trading market for the Common Shares.
ACPT intends to apply for listing of the Common Shares offered hereby on the
AMEX and the PSE.
The IGC Units are listed for trading on the AMEX and the PSE under the
ticker symbol "IGC." The following table sets forth, for the periods
indicated, the closing sale price of the IGC Units as reported on the AMEX in
such periods (and paid in the subsequent period). As of March 31, 1998, the
record number of IGC Unitholders was approximately 300.
<TABLE>
<CAPTION>
1995 HIGH LOW DISTRIBUTION
---- ------- ------- ------------
<S> <C> <C> <C>
1st Quarter..................................... 7 1/2 3 1/4 (1)
2nd Quarter..................................... 4 3/8 3 1/4 $ --
3rd Quarter..................................... 4 3/4 3 1/2 $ --
4th Quarter..................................... 4 1/8 2 15/16 $ --
<CAPTION>
1996 HIGH LOW DISTRIBUTION
---- ------- ------- ------------
<S> <C> <C> <C>
1st Quarter..................................... 4 3 $ --
2nd Quarter..................................... 3 7/8 2 3/4 $.06
3rd Quarter..................................... 3 2 3/8 $.05
4th Quarter..................................... 3 1/2 2 5/16 $ --
<CAPTION>
1997 HIGH LOW DISTRIBUTION
---- ------- ------- ------------
<S> <C> <C> <C>
1st Quarter..................................... 3 7/8 2 7/8 $ --
2nd Quarter..................................... 3 13/16 2 15/16 $ --
3rd Quarter..................................... 4 2 7/8 $ --
4th Quarter..................................... 5 3/8 3 1/4 $ --
<CAPTION>
1998 HIGH LOW DISTRIBUTION
---- ------- ------- ------------
<S> <C> <C> <C>
1st Quarter..................................... 5 1/2 4 1/8 $.02
2nd Quarter..................................... 5 1/8 4 $ --
3rd Quarter to.................................. 4 7/8 4 1/8 $ --
August 6, 1998
</TABLE>
- --------
(1) On February 6, 1995, IGC distributed to its Unitholders 5,128,372 Equus
Units, representing in the aggregate beneficial ownership of a 99% limited
partnership interest in Equus Gaming Company L.P.
62
<PAGE>
SELECTED COMBINED HISTORICAL FINANCIAL AND OPERATING DATA OF AMERICAN
COMMUNITY PORTFOLIO PROPERTIES
The following table sets forth financial and operating information of ACPP
(as defined in Note 1 to the Combined Historical Financial Statements) on a
historical combined basis.
The combined historical income statement data for 1993 and the combined
historical balance sheet data for 1994 and 1993 have been derived from
unaudited combined historical financial statements of ACPP which, in the
opinion of management, include all material adjustments necessary for those
periods and were prepared as if ACPP were a separate entity for all periods
presented. The historical combined financial and operating data is not
necessarily indicative of ACPP's future results of operations or financial
condition. The data set forth below should be read in conjunction with the
unaudited Pro Forma Financial Data of ACPT and the notes thereto; the audited
Combined Historical Financial Statements of ACPP and the notes thereto; and
Management's Discussion and Analysis of Financial Condition and Results of
Operations of ACPP included elsewhere in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
----------------------- --------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
----------- ----------- ------- ------- ------- ------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data
Land sales............. $5,961 $1,519 $13,165 $13,674 $15,441 $21,168 $16,434
Rental property
revenues.............. 2,209 2,158 8,737 7,577 4,642 4,537 2,113
Equity in earnings from
partnerships and
developer fees........ 505 398 1,509 16,585 2,514 4,878 3,736
Management and other
fees.................. 976 1,343 3,775 4,816 3,894 3,507 4,494
Interest and other
income................ 137 143 943 982 693 649 757
Total revenues......... 9,788 5,561 28,129 43,634 27,184 34,739 27,534
Cost of land sales..... 3,608 970 8,494 9,378 7,801 12,934 11,066
Interest expense....... 910 961 3,820 4,433 4,263 4,337 2,042
General and
administrative
expense............... 1,600 1,530 6,607 6,810 6,769 6,619 6,288
Other operating
expenses.............. 2,145 1,325 6,744 5,518 2,667 2,676 2,419
Total expenses......... 8,263 4,786 25,665 26,139 21,500 26,566 21,815
Minority interest...... (241) (94) (600) (444) (511) (680) (122)
Income tax provision
(benefit)............. 283 60 470 3,424 1,369 3,304 (1,120)(2)
Net income............. 1,001 621 1,394 12,695 (1) 3,804 4,189 6,717 (2)
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
AS OF MARCH 31, YEAR ENDED DECEMBER 31,
----------------------- --------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
----------- ----------- -------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data
Assets related to rental properties.. $ 45,854 $ 52,771 $ 47,421 $ 52,011 $ 35,561 $35,107 $38,936
Assets related to community
development......................... 58,243 62,228 61,647 63,000 59,309 49,490 55,173
Cash and other assets................ 7,186 4,291 6,054 5,565 7,083 7,491 5,716
Total assets......................... 111,283 119,290 115,122 120,576 101,953 92,088 99,825
Debt related to rental properties
Recourse............................. 918 1,098 969 1,139 1,334 1,559 1,857
Non-recourse......................... 38,995 39,409 39,101 39,508 22,650 22,771 22,457
Debt related to community development
Recourse............................. 34,128 37,022 39,784 38,943 49,941 42,351 47,217
Non-recourse......................... 2,324 2,212 2,295 2,153 2,034 4,270 14,775
Other liabilities.................... 17,066 19,080 16,957 18,745 12,781 10,961 9,840
Total liabilities.................... 93,431 98,821 99,106 100,488 88,740 81,912 96,146
Capital.............................. 17,852 20,469 16,016 20,088 13,213 10,176 3,679
Operating Data
Rental apartment units managed at end
of period............................ 8,139 8,139 8,139 8,139 8,085 8,085 8,029
Units under construction.............. -- -- -- -- 54 -- 56
Community Development
Residential lots sold................ 200 23 231 406 113 101 180
Residential lots transferred to joint
venture............................. -- -- 118 98 -- -- --
Residential lots transferred to
Company's rental property
operations.......................... -- -- -- -- 54 -- 56
Commercial and business park acres
sold................................. 31 9 17 5 20 76 12
Undeveloped acres sold................ -- -- 381 -- 2 20 27
</TABLE>
- --------
(1) Includes a $932,000 reduction for an extraordinary item-early
extinguishment of debt.
(2) Includes a $1,371,000 benefit for the cumulative effect of a change in
accounting principle to reflect the adoption of SFAS No. 109, "Accounting
for Income Taxes".
64
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
The following discussion should be read in conjunction with the Selected
Combined Historical Financial and Operating Data, Pro Forma Combined Financial
Data of ACPT and the Combined Historical Financial Statements of ACPP and the
related notes included elsewhere in this Proxy Statement/Prospectus.
GENERAL.
ACPT was formed on March 17, 1997 as a new business without prior operations
in order to succeed to the principal real estate assets and businesses of IGC
as a result of the Restructuring and is referred to as American Community
Portfolio Properties ("ACPP"). The following discussion and analysis of
results of operations of ACPP for the three months ended March 31, 1998 and
1997 and the years ended December 31, 1997, 1996 and 1995 reflects the actual
results of operations for such periods associated with the assets and
businesses of IGC that will be transferred to ACPT in the Restructuring. This
discussion should be read in conjunction with the Combined Historical
Financial Statements of ACPP and accompanying notes appearing elsewhere in
this Proxy Statement/Prospectus. In particular, Note 1 to the Combined
Historical Financial Statements of ACPP details the assets and businesses that
are the subject of the following discussion and analysis.
Historically, ACPP's operations and financial results have been
significantly affected by the cyclical nature of the real estate industry.
Accordingly, ACPP's combined historical financial statements may not be
indicative of future results.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997.
Community Development Operations.
Community development land sales revenue increased $4,442,000 to $5,961,000
(none of which were to affiliates) during the first three months of 1998,
compared to sales of $1,519,000 (of which $70,000 were to affiliates) during
the first three months of 1997. This increase was attributable to a sale of
residential lots in Puerto Rico of $4,000,000. Residential lots in Puerto Rico
are sold to homebuilders in bulk creating fluctuations in lot sales revenue
when compared on a quarterly basis. The gross profit margin for the first
three months of 1998 increased to 39%, as compared to 36% in the same period
of 1997. This increase was due primarily to the sales mix. During the first
quarter of 1998, the U.S. division sold a large industrial parcel, located in
an undeveloped industrial park, which had a low cost basis. There were no
similar sales during the comparable quarter of 1997.
Rental Property Revenues, Net of Operating Expenses.
Rental property revenues, net of operating expenses, decreased less than 1%
to $1,313,000 during the first three months of 1998, as compared to $1,323,000
in the same period in 1997. The decrease is primarily attributable to a 7%
increase in operating expenses offset by a 2% increase in rental revenues. The
increase in operating expenses is a result of an increase in overhead and
timing difference of utility costs.
Equity in Earnings from Partnerships and Developer Fees.
Equity in earnings increased 27% to $505,000 during the first three months
of 1998 as compared to $398,000 during the first three months of 1997. This
increase is primarily due to earnings generated from the homebuilding joint
venture during the first quarter of 1998, with no such earnings in the first
quarter of 1997, offset in part by reduced earnings from partnerships that
paid refinancing fees or had reduced income due to temporary reduction in
occupancy in the first quarter of 1998 as compared to the same period in 1997.
65
<PAGE>
Management and Other Fees.
Management and other fees decreased 27% to $976,000 in the first quarter of
1998, as compared to $1,343,000 in the first quarter of 1997. The decrease is
primarily attributable to a reduction of $457,000 in fees earned from the
refinancing of certain apartment complexes, offset by $100,000 of incentive
fees earned during the first quarter of 1998 as compared to the same period in
1997.
Interest Expense.
Interest expense decreased 5% to $910,000 during the first three months of
1998, as compared to $961,000 for the first three months of 1997. This
decrease is primarily attributable to a $3,379,000 decrease in outstanding
debt from March 31, 1998 as compared to March 31, 1997.
General and Administrative Expense.
General and administrative expenses increased 5% to $1,600,000 for the first
three months of 1998, as compared to $1,530,000 for the same period of 1997.
This increase was a result of general inflation and timing differences offset
in part by management's continued focus on cost efficiency and the reduction
of expenses.
Spin-off Costs.
Costs of $757,000 related to the Restructuring were recognized as an expense
during the first three months of 1998. There were no such costs in the first
quarter of 1997.
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996.
Community Development Operations.
Community development land sales revenue decreased 4% to $13,165,000 (of
which $3,105,000 were to affiliates) during 1997 compared to $13,674,000 (of
which $10,066,000 were to affiliates) during 1996. This decrease was caused by
a reduction in residential lot sales in Puerto Rico, offset by increases in
residential and commercial lot sales in the U.S. The timing of the various
sales causes fluctuations when comparing annual results. Even though the sales
revenues were down, the gross margin during 1997 increased to 35% compared to
31% in 1996. This increase is primarily due to the mix of sales. During 1997,
23% of the sales revenue was generated by an undeveloped bulk parcel with a
low acquisition cost. There were no similar sales during 1996.
Rental Property Revenues, Net of Operating Expenses.
Rental properties revenues, net of operating expenses, increased 19% to
$5,140,000 during 1997 as compared to $4,332,000 during 1996. This increase is
due to the consolidation of four additional partnerships when they became
majority owned through an acquisition of additional limited partnership
interests on April 1, 1996.
Equity in Earnings from Partnerships and Developer Fees.
Equity in earnings decreased $15,076,000 to $1,509,000 during 1997 from
$16,585,000 during 1996. During March 1996, ACPP completed the sale of four
Puerto Rico apartment projects. The properties, totalling 918 rental units,
were sold under the 1990 Low Income Housing Preservation and Resident
Homeownership Act ("LIHPRHA"). This decrease was primarily due to the
$14,637,000 earned on the LIHPRHA sale during the 1996 period and the
elimination of the equity in earnings in the four partnerships consolidated
during the 1997 period.
Management and Other Fees.
Management and other fees decreased $1,041,000 or 22% during 1997 compared
to 1996. This decrease was due primarily to special management fees of
$1,362,000 earned in the first quarter of 1996 from the
66
<PAGE>
LIHPRHA transaction and the elimination of the management fees in the four
partnerships consolidated during 1997, offset in part by fees of $724,000
earned from the refinancing of two apartment complexes in 1997.
Interest Expense.
Interest expense decreased $613,000 to $3,820,000 during 1997 compared to
$4,433,000 during 1996. This decrease is primarily attributable to $500,000 of
late fees incurred during 1996 and reduced outstanding debt balances during
1997, offset in part by interest attributable to the additional four
properties consolidated April 1, 1996, as discussed above.
General and Administrative Expense.
General and administrative expenses decreased by $203,000 to $6,607,000
during 1997 compared to $6,810,000 during 1996 as a result of management's
continued focus on cost efficiency.
Spin-off Costs.
Costs of $1,164,000 related to the Restructuring were recognized as an
expense in 1997. There were no such costs in 1996.
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995.
Community Development Operations.
Community development land sales decreased in 1996 as compared with 1995 by
approximately $1,767,000 due primarily to reduction of commercial lot sales,
offset in part by increased residential lot sales in Puerto Rico. The U.S.
residential lot sales volume has continued to be unfavorably impacted by
competitive market conditions.
The gross profit margins for 1996 and 1995 were 31% and 49%, respectively.
This decrease in gross profit margin was due primarily to the change in the
mix of sales. U.S. commercial sales, which generally have higher gross
margins, as a percent of land sales revenue were 0% in 1996 as compared to 24%
in 1995. U.S. commercial land sales produce the highest gross margins since
their sales prices are higher and they require less development than business
park and residential land.
Rental Property Revenues Net of Operating Expenses.
Rental property revenues, net of operating expenses, increased 47% to
$4,332,000 during 1996 as compared to $2,947,000 during 1995. This increase is
due to the consolidation of four additional partnerships when they became
majority owned through an acquisition of limited partnership interests on
April 1, 1996.
Equity in Earnings from Partnerships and Developer Fees.
Equity in earnings from partnerships increased to $16,585,000 during 1996
from $2,514,000 during 1995. This increase is attributable to ACPP's share of
a 1996 gain from the LIHPRHA sale. There were no similar transactions in 1995.
Management and Other Fees.
Management and other fees increased 24% to $4,816,000 during 1996 from
$3,894,000 during 1995. This increase was primarily due to $1,362,000 of fees
earned in 1996 from the LIHPRHA sale, offset by the elimination of $153,000 of
management fees earned from the four partnerships consolidated as of April 1,
1996, the negotiated reduction of $100,000 per year effective June 1, 1996 on
one of the management contracts and an additional $197,000 of deferred
management fees that were recognized in 1995.
67
<PAGE>
Interest Expense.
Interest expense increased $170,000 to $4,433,000 during 1996 from
$4,263,000 during 1995 primarily due to the consolidation of the four
additional rental properties partnerships, offset in part by the reduction of
non-rental property loan balances.
General and Administrative Expense.
General and administrative expenses increased less than 1% to $6,810,000
during 1996 as compared to $6,769,000 in 1995 primarily as a result of
management's continued focus on cost efficiency of these expenses.
LIQUIDITY AND CAPITAL RESOURCES.
Cash and cash equivalents were $2,126,000 and $2,127,000 at March 31, 1998
and December 31, 1997, respectively. This decrease was attributable to
$8,884,000 provided by operating activities, offset by $3,908,000 and
$4,977,000 used in investing and financing activities, respectively. The cash
inflow from operating activities was primarily attributable to land sales,
collection of notes receivable and distributions from unconsolidated
partnerships. The cash outflow for investing activities was primarily
attributable to land improvements put in place for future land sales and
deposits into escrow accounts. During the first three months of 1998,
$7,400,000 of debt repayments were made as compared to $1,588,000 of debt
advances received.
ACPP has historically met its liquidity requirements principally from cash
flow generated from land sales, property management fees, distributions from
residential rental partnerships and from bank financing providing funds for
development and working capital.
Over the past several years, cash flows have been constrained because of the
terms of its existing debt agreements and the reluctance of new lending
opportunities as a result of the wetlands litigation (see "Legal Proceedings--
IGC--Wetlands Litigation"). As a result, substantially all of the cash
generated has been used to pay debt service requirements with existing
lenders. This resulted in limited opportunities for new construction and
development. The recently closed Banc One financing provided funding to
commence construction in Fairway Village, the third village in St. Charles,
and will allow ACPP to retain a greater portion of its U.S. land sales
proceeds. ACPP currently has other development projects in various stages of
completion. Substantially all of the projects under construction have
sufficient development loans in place to complete the construction.
ACPP's principal demands for liquidity are expected to be the continued
funding of its current debt service and operating cost requirements. After the
Distribution, management expects to obtain additional funding which can be
used to fund new community development projects. Such sources of funding may
include, but are not limited to, excess operating cash flows, secured or
unsecured financings, private or public offerings of debt or equity
securities, extension or refinancings of $10,152,000 of loans that are due in
1998 and proceeds from sales of properties. However, there are no assurances
that these funds will be generated.
68
<PAGE>
DEBT SUMMARY
Substantially all of ACPP's assets, $111,000,000, are encumbered by
$35,000,000 of recourse debt and $41,000,000 of non-recourse debt; $39,000,000
of the non-recourse debt is attributable to the mortgages of consolidated
rental property partnerships. The significant terms of ACPP's other debt
financing arrangements are shown below (dollars in thousands):
<TABLE>
<CAPTION>
BALANCE
MAXIMUM INTEREST MATURITY OUTSTANDING
DESCRIPTIONS BORROWINGS RATE DATE 3/31/98
- ------------ ---------- -------- -------- -----------
<S> <C> <C> <C> <C>
Banc One-term loan(a)................. $11,000 P+2.5% 7/31/04 $10,000
Banc One-development loan(a).......... 4,000 P+2.5% 7/31/04 1,170
Banc One-remediation loan(a).......... 5,000 P+2.5% 7/31/04 3,366
First Bank-term loan(b)............... 9,865 P+1.5% 8/31/98 7,399
First Bank-construction loan(b)....... 5,500 P+1.5% 6/30/98 2,113
IGC(c)................................ 7,908 P+1.5% 8/2/09 6,956
RG-Premier Bank(d).................... 1,641 P+1.5% 4/30/99 1,479
Citibank(e)........................... 969 (e) demand 918
Banco Santander(f).................... 887 P+1% 9/29/98 640
Washington Savings Bank(g)............ 1,317 9.5% 9/30/99 818
Other Miscellaneous................... 188 Various Various 188
------- -------
$48,275 $35,047
======= =======
</TABLE>
- --------
(a) The three notes are cross-collateralized by substantially all of the U.S.
land and the U.S. and Puerto Rico future cash entitlements pursuant to its
ownership interest in the housing partnerships. Interest is paid monthly.
The loan agreement calls for a minimum of $2,000,000 principal
curtailments in 1998, and $3,000,000 in each of the following six years.
In addition, ACPT is to establish a $1,000,000 development reserve during
1998 of which $500,000 has been funded. It is ACPT's intention to meet the
required payments from land sales and proceeds from the refinancing of a
rental property. On each anniversary date, ACPT is to pay an additional
fee, 1% in 1998 and 1999, increasing 1/2% in the following four years, and
grant an option to the lender to purchase an additional 75,000 shares at a
strike price to be determined after the restructure. The loan agreement
covenants include restrictions on additional indebtedness of ACPT and St.
Charles Community LLC. The loan agreement contains a cross default
provision for any amounts in excess of $1,000,000 past due for 45 days
after demand notification.
(b) The two notes are cross-collateralized by the Puerto Rico land assets. The
interest is paid monthly from an interest reserve. Principal payments are
funded through the partial release prices of the collateral. ACPT expects
to extend the maturity date of these loans. The loan agreement covenants
include restrictions on distributions by LDA and additional indebtedness
of LDA and cross default provisions for other loan payment defaults.
(c) The interest rate is subject to a 9% ceiling and a 6% floor. Principal and
interest are paid from available cash flow as determined by management.
(d) The note requires monthly principal payments of $27,000 and is secured by
three mortgage notes receivable totalling $2,717,600. Interest is paid
monthly by advances under the loan agreement.
(e) The note requires monthly payments of interest calculated at 250 basis
points over the cost of funds, 8.406% at December 31, 1997. The note was
secured by a letter of credit that expired in January 1998. Management is
currently renegotiating the terms of this loan.
(f) The loan is collateralized by a pledge of two mortgage notes receivable
totalling $2,760,000. Monthly principal payments of $27,000 are required.
Additional principal is paid from the sale of residential parcels in Phase
II of Parque Escorial.
(g) The note requires monthly payments of interest and is collateralized by
the land under development for 115 townhome lots in St. Charles, Maryland.
The loan is to be repaid from the sale of townhome lots that are currently
under an option contract.
69
<PAGE>
MATERIAL NEGATIVE DEBT COVENANTS
ACPP is subject to certain restrictive covenants by its debt instruments.
The material negative covenants are as follows:
ACPP is required to obtain prior approval before incurring any liens on its
assets or incurring any additional indebtedness. ACPP is prohibited from
making distributions in excess of the minimum distributions required by ACPT's
Declaration of Trust without prior lender approval. Lender approval is also
required by LDA prior to making cash distributions in excess of distributions
to pay income taxes on LDA generated taxable income unless certain cash flow
conditions exist that provide adequate working capital for debt service and
operations for the following twelve months. Lender approval is required prior
to ACPP making any guarantee or loan out of the normal course of business.
ACPP is prohibited from selling or disposing substantially all of its assets
outside the ordinary course of business or entering into any significant new
line of business. LDA may not enter into any transaction with any affiliate
out of the normal course of business and for terms less favorable than would
be obtained in an arm's-length transaction without prior lender approval.
Prior approval is also required for any change in the ownership of LDA, any
amendments to LDA's partnership agreement, or any merger, reorganization or
acquisition of LDA.
YEAR 2000
ACPP has assessed and continues to assess the impact of the Year 2000 issue
on its reporting systems and operations. The Year 2000 issue exists because
many computer systems and applications and other systems using computer chips
currently use two-digit fields to designate a year. As the century date
occurs, date sensitive systems may recognize the year 2000 as 1900 or not at
all. This inability to recognize or properly treat the year 2000 may cause the
systems to process critical financial and operations information incorrectly.
ACPP's reporting systems are Year 2000 compliant with the exception of one
module. The Company has engaged a programmer at a nominal cost to bring this
module into compliance. Management is continuing to review the remaining
operating systems and computer systems that affect the properties ACPP
manages. This review is continuing and management has not yet determined
whether these remaining systems are Year 2000 compliant, and if not, whether
the failure to correct them would have a material effect on the operations or
financial performance of ACPT.
FORWARD-LOOKING STATEMENTS
Certain matters discussed and statements made within this Registration
Statement are forward-looking statements within the meaning of the Private
Litigation Reform Act of 1995 and as such may involve known and unknown risks,
uncertainties, and other factors that may cause the actual results,
performance or achievements of ACPP to be different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Although ACPP believes the expectations reflected in such forward-
looking statements are based on reasonable assumptions, it can give no
assurance that its expectations will be attained. These risks will be detailed
from time to time in ACPP's filings with the Securities and Exchange
Commission or other public statements.
70
<PAGE>
BUSINESS AND PROPERTIES OF ACPT
Following completion of the Restructuring, ACPT will be engaged in four
principal lines of business formerly conducted by IGC: (i) ownership of rental
apartment properties in the United States and Puerto Rico, (ii) community
development in the United States and Puerto Rico, (iii) property management
services in the United States and Puerto Rico, and (iv) development of
commercial rental properties and/or ground leases in Puerto Rico. In addition,
ACPT will be engaged in limited condominium building operations in Puerto
Rico. Set forth below is a brief description of these businesses as they will
be owned and conducted following the Restructuring.
RENTAL APARTMENT PROPERTIES.
United States.
ACPT, indirectly through its REIT subsidiary American Rental and American
Rental's limited partnership subsidiary American Housing, will hold interests
in 13 U.S. Apartment Partnerships that own and operate apartment facilities in
Maryland and Virginia. The U.S. Apartment Partnerships own a total of 2,246
rental units. Each of the apartment properties is financed by a mortgage that
is non-recourse to the apartment partnership. As non-recourse mortgages, the
partners are not jointly and severally liable for the debt. HUD provides rent
subsidies to residents of 993 of the apartment units and interest subsidies
for 415 units. In addition, 110 units are leased pursuant to HUD's Low Income
Housing Tax Credit program, and 200 other units are leased under income
guidelines set by the Maryland Community Development Administration. The
remaining units are leased at market rates.
The partnership agreements of the U.S. Apartment Partnerships provide that
American Housing will receive between 50% and 99.9% of distributable surplus
cash from operations, refinancings or dispositions as general partner in seven
of the partnerships. In two of these partnerships, American Housing also will
receive 25.5% of the distributable surplus cash from operations as a limited
partner. In five of the partnerships, American Housing will receive 0% to 5%
of the distributable surplus cash from operations as general partner until the
limited partners have received cash distributions equal to their contributed
capital. Thereafter, American Housing as general partner will share in 50% of
the distributable cash flow from operations, refinancings and dispositions. In
two of these partnerships, American Housing also will receive 51% of the cash
distributions as limited partner. Once the limited partners have received cash
distributions equal to their contributions and American Housing's general
partner's distributions increase to 50%, American Housing's limited
partnership distributions will decrease to 25.5%. American Housing directly
and indirectly will receive 100% of the distributable cash flow from
operations in one of the partnerships.
71
<PAGE>
The table below sets forth the name of each U.S. Apartment Partnership; the
number of rental units in the property owned by such partnership; the project
cost; the percentage of such units under lease; and the expiration date for
any subsidy contract:
<TABLE>
<CAPTION>
3/31/98 EXPIRATION
NO. OF APT. PROJECT COST OCCUPANCY AT OF SUBSIDY
UNITS (IN THOUSANDS) 3/31/98 CONTRACT
----------- -------------- ------------ --------------
<S> <C> <C> <C> <C>
Bannister Associates
Limited
Partnership (1)....... 208 $ 5,076 96% 1998 41 units
2017 167 units
Brookside Gardens
Limited
Partnership (2)....... 56 2,688 73% N/A
Crossland Associates
Limited
Partnership (3)....... 96 3,269 82% N/A
Fox Chase Apartments
General
Partnership (4)....... 176 7,895 91% N/A
Headen House Associates
Limited
Partnership (5)....... 136 5,990 96% 2000
Huntington Associates
Limited
Partnership (6)....... 204 10,303 93% 2000
Lakeside Apartments
Limited
Partnership (7)....... 54 4,169 98% N/A
Lancaster Apartment
Limited
Partnership (8)....... 104 4,949 89% N/A
New Forest Apartments
General
Partnership (4)....... 256 13,768 88% N/A
Palmer Apartments
Associates
Limited Partnership
(9)................... 152 5,696 90% 2000
Wakefield Terrace
Associates
Limited Partnership
(10).................. 204 6,339 92% 1998 40 units
2020 164 units
Wakefield Third Age
Associates
Limited Partnership
(11).................. 104 3,120 97% 1998 20 units
2019 84 units
Essex Apartments
Associates
Limited Partnership
(12).................. 496 19,250 97% 2000
----- -------
2,246 $92,512
===== =======
</TABLE>
- --------
(1) Receives subsidies under the National Housing Act up to a maximum of
$184,020 per year.
(2) Not subsidized, but all units are set aside for low to moderate income
tenants over 62 years of age under provisions set by the Low Income
Housing Tax Credit ("LIHTC") program.
(3) Not subsidized.
(4) Not subsidized, but 20% of the units are subject to income guidelines set
by Sections 4a and 103b of the Internal Revenue Code of 1954.
(5) Receives subsidies under the National Housing Act up to a maximum of
$1,369,008 per year.
(6) Receives subsidies under the National Housing Act up to a maximum of
$2,066,040 per year.
(7) Not subsidized, but all units are set aside for low to moderate income
tenants over 55 years of age under provisions set by the LIHTC program.
(8) Not subsidized, but 51% of the units are subject to income guidelines set
by the Maryland Community Development Administration ("MCDA").
(9) 56 units are subsidized and receive subsidies under the National Housing
Act up to a maximum of $474,432 per year. 96 units are not subsidized,
but 51% of these are subject to income guidelines set by MCDA.
(10) Receives subsidies under the National Housing Act up to a maximum of
$194,220 per year.
(11) Receives subsidies under the National Housing Act up to a maximum of
$90,480 per year.
(12) Receives subsidies under the National Housing Act up to a maximum of
$3,326,592 per year.
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Puerto Rico.
In addition, ACPT, indirectly through its partnership subsidiary IGP Group,
and IGP Group's partnership subsidiary IGP, will hold interests in 9 Puerto
Rico Apartment Partnerships that own and operate a total of 12 apartment
facilities in Puerto Rico. The Puerto Rico Apartment Partnerships own a total
of 2,653 rental units, all of which are subject to rent subsidies from HUD.
The properties held by the Puerto Rico Apartment Partnerships are financed by
mortgages that are non-recourse to the partners.
Two of the partnership agreements of the Puerto Rico Apartment Partnerships
provide that IGP currently receives 50% of the net cash flow from operations.
In the remaining seven partnerships, IGP receives a 0% to 5% interest in
profits, losses and net cash flow from operations until such time as the
limited partners have received cash distributions equal to their capital
contributions. Thereafter, IGP will share in 50% to 60% of cash distributions
from operations, refinancing and disposition. As a result of loans made to six
of the Puerto Rico Apartment Partnerships, IGP also holds notes payable by
such partnerships that are required to be paid prior to the making of
distributions from the partnerships from refinancing, sale or other capital
events.
ACPT intends to benefit from certain projected trends in Puerto Rico. Puerto
Rico is estimated to have approximately 3.7 million inhabitants at present,
and its population is projected to grow annually at a rate of between .56% and
.97% between 1995 and 2010, as determined by the Puerto Rico Planning Board.
The typical Puerto Rican family has decreased in size from 3.8 in 1987 to 3.5
in 1996, which has caused the number of families and households to grow at a
faster rate than the population, a trend that is expected to continue and have
a positive effect in demand for housing. Puerto Rico's growing population has
resulted in greater construction activity in the residential sector, and has
shifted construction from single-family homes to multi-family construction
such as walk-up condominiums. Per capita personal income increased to $7,882
in fiscal year 1996 from $7,374 in 1995 and $7,079 in 1994. The economy of
Puerto Rico registered a real growth of 3.2% during fiscal year 1997 in its
gross product, compared with increases of 3.3% in 1996, 3.4% in 1995 and 2.5%
in 1994.
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The table below sets forth the name of each apartment property owned by the
Puerto Rico Apartment Partnerships; the number of rental units in the property
owned by such partnership; the project cost; the percentage of such units
under lease; and the expiration date for any subsidy contract:
<TABLE>
<CAPTION>
3/31/98
NO. OF PROJECT EXPIRATION
APT. COST OCCUPANCY OF SUBSIDY
UNITS (IN THOUSANDS) AT 3/31/98 CONTRACT
------ -------------- ---------- ----------
<S> <C> <C> <C> <C>
San Anton (1)...................... 184 $ 4,610 99% 1998
Monserrate I (2)................... 304 11,469 99% 1999
Alturas del Senorial (3)........... 124 4,674 99% 1999
Jardines de Caparra (4)............ 198 7,371 100% 2000
Colinas de San Juan (5)............ 300 12,059 99% 2001
Bayamon Gardens (6)................ 280 13,609 99% 2011
Vistas del Turabo (7).............. 96 3,369 100% 2021
Monserrate II (8) (9).............. 304 12,276 99% 2020
Santa Juana (8) (10)............... 198 7,480 100% 2020
Torre De Las Cumbres (8) (11)...... 155 6,589 100% 2020
De Diego (8) (12).................. 198 7,514 100% 2020
Valle del Sol (13)................. 312 15,291 99% 2003
----- --------
2,653 $106,311
===== ========
</TABLE>
- --------
(1) Receives subsidies under the National Housing Act up to a maximum of
$1,339,200 per year.
(2) Receives subsidies under the National Housing Act up to a maximum of
$1,916,464 per year.
(3) Receives subsidies under the National Housing Act up to a maximum of
$570,672 per year.
(4) Receives subsidies under the National Housing Act up to a maximum of
$891,048 per year.
(5) Receives subsidies under the National Housing Act up to a maximum of
$1,339,200 per year.
(6) Receives subsidies under the National Housing Act up to a maximum of
$1,512,144 per year.
(7) Receives subsidies under the National Housing Act up to a maximum of
$477,148 per year.
(8) This property is owned by Carolina Associates L.P., a Maryland limited
partnership in which IGP holds a 50% interest.
(9) Receives subsidies under the National Housing Act up to a maximum of
$1,541,260 per year.
(10) Receives subsidies under the National Housing Act up to a maximum of
$994,032 per year.
(11) Receives subsidies under the National Housing Act up to a maximum of
$813,444 per year.
(12) Receives subsidies under the National Housing Act up to a maximum of
$994,032 per year.
(13) Receives subsidies under the National Housing Act up to a maximum of
$2,196,792 per year.
Government Regulation.
HUD subsidies are provided principally under Sections 8 and 236 of the
National Housing Act. Under Section 8, the government pays to the applicable
apartment partnership the difference between market rental rates (determined
in accordance with government procedures) and the amounts that the government
deems the residents are able to afford. Under Section 236, the government
provides interest subsidies directly to the applicable apartment partnership
through a reduction in the property's mortgage interest rate and with a
corresponding reduction in resident rental rates. In order to comply with the
requirements of Section 8 and Section 236, residents are screened by American
Management or IGP for eligibility under HUD guidelines. Subsidies are provided
according to the terms of long-term contracts between the federal government
and the apartment partnerships.
Cash flow from those projects whose mortgage loans are still insured by the
Federal Housing Authority ("FHA"), or financed through the housing agencies in
Maryland, Virginia, Puerto Rico or Washington, D.C. (the "State Financing
Agencies") are subject to guidelines and limits established by the apartment
partnerships' regulatory agreements with HUD and the State Financing Agencies.
The regulatory agreements also require that
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if the cash from operations generated by certain apartment properties has
exceeded the allowable cash distributions, the surplus must be deposited into
restricted escrow accounts held by the mortgagee of the property and
controlled by HUD or the applicable State Financing Agency. Funds in these
restricted escrow accounts may be used for maintenance and capital
improvements with the approval of HUD and/or the State Finance Agency.
The federal government has virtually eliminated subsidy programs for new
construction of low and moderate income housing by profit-motivated developers
such as ACPT. As a result, no new construction of apartment projects is
expected in Puerto Rico and any new apartment properties developed by ACPT in
the U.S. most likely will offer market rate rents.
The subsidy contracts for ACPT's investment apartment properties are
scheduled to expire between 1997 and 2020. In addition, the long term subsidy
contracts for six Puerto Rico properties that are scheduled to expire in 2011,
2020 or 2021 may be cancelled by the applicable Puerto Rico Apartment
Partnership in 2000 (for contracts to expire in 2020) or 2001 (for contracts
to expire in 2011 or 2021) and thereafter every five years until expiration.
Under a recently enacted law, HUD may renew expiring subsidy contracts on a
year to year basis, and ACPT intends to seek the renewal of expiring subsidy
contracts for its U.S. properties. Depending on market conditions, ACPT
intends to convert to condominiums apartment properties in Puerto Rico that
have subsidy contracts that expire over the next several years. Two such
conversions are currently in progress. See "--Condominium Conversion."
HUD also is seeking Congressional authority to convert expired contracts to
resident-based vouchers. This would allow residents to choose where they wish
to live. This can potentially impact the income stream of certain properties.
However, ACPT will actively maintain its properties in a manner designed to
preserve their values and retain residents.
HUD also is exploring a program known as "portfolio re-engineering" or
"mark-to-market." This would assist owners of Section 8 and HUD-insured
properties that could not meet loan obligations under the proposed resident-
based voucher system. ACPT will monitor the progress of this proposal and its
impact on the properties in which it holds interests through the apartment
partnerships.
Competition.
ACPT's investment properties that receive rent subsidies are not subject to
the market conditions that affect occupancy at properties with market rate
rents. These subsidized properties average approximately 99% occupancy rates
year round. ACPT's apartments in St. Charles that have market rate rents are
impacted by the supply and demand for competing rental apartments in the area,
as well as the local housing market. When for sale housing becomes more
affordable due to lower mortgage interest rates or softening home prices, this
can adversely impact the performance of rental apartments. Conversely, when
mortgage interest rates rise or home prices increase, the market for rental
units may benefit.
CONDOMINIUM CONVERSION.
Puerto Rico.
Most of the apartment properties in Puerto Rico were designed, located and
maintained with the expectation that they might be converted into condominiums
upon the expiration of subsidy contracts 20 to 40 years after construction.
The existing debt on most of the Puerto Rico apartment properties is low when
compared to present values. In addition, the demand for centrally located
residential units within the San Juan metropolitan area, coupled with the
acceptance of the condominium concept in Puerto Rico, make condominium
conversions of the Puerto Rico apartment units an attractive strategy.
ACPT's indirect subsidiary IGP has a record of success in this conversion
procedure, having previously converted 1,800 units in Puerto Rico owned by IGP
and certain affiliates. These were properties which proved to
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be unsuccessful as market rent apartments. Their conversion to condominiums
permitted IGP and the affiliates to profit from these properties despite a
relatively high debt structure.
Currently, IGP is in the process of converting two former apartment
properties, Monte de Oro and New Center, into condominiums. Construction of
the improvements to be made at the properties commenced in May 1998 and is
expected to be completed by the end of the first quarter in 1999. Interim
financing required to complete the improvements is in the process of being
obtained. All units at both properties are targeted to be sold by early 2000.
The subsidy contracts for eight of the properties owned by the Puerto Rico
Apartment Partnerships expire no later than 2003, and the contracts for the
remaining properties may be cancelled by the applicable partnership in either
2000 or 2001 and every five years thereafter. ACPT currently intends to
convert some or all of such properties into condominiums upon the expiration
or cancellation of the contracts.
United States.
Because of the risk that sales of condominium units by American Housing
would constitute "prohibited transactions" under the rules governing REITs,
which would subject the profits from such sales to a 100% tax, ACPT currently
does not intend to convert any of the properties owned by the U.S. Apartment
Partnerships into condominiums. See "Income Tax Considerations--Federal Income
Tax Considerations--Federal Income Tax Classification of American Rental--
Taxation of American Rental as a REIT."
COMMUNITY DEVELOPMENT.
ACPT's community development assets will consist of more than 4,700 acres of
developed and undeveloped land located in the master planned communities of
St. Charles, Maryland, and Parque Escorial, in Carolina, Puerto Rico. The land
in both communities will be developed by ACPT and its affiliates for a variety
of residential uses, including single-family homes, townhomes, condominiums
and apartments, and commercial and industrial uses. ACPT may also develop for
residential use certain land adjacent to the site of a planned commercial
development in Canovanas, Puerto Rico.
St. Charles.
ACPT, indirectly through American Land, will own the more than 4,500 acres
remaining for development in the planned community of St. Charles. St. Charles
contains a total of approximately 9,100 acres (approximately 14 square miles)
located in Charles County, Maryland, 23 miles southeast of Washington, D.C.
Based on figures prepared by the Charles County Department of Planning and
Growth Management ("DPGM"), the current population of Charles County is in
excess of 115,000, up from 101,000 in 1990, and is projected to increase from
123,200 in 2000 to 166,500 in 2015. The real property tax base has increased
from $547 million in 1980 to $2.4 billion in 1996, with the residential base
accounting for 77% of the total. The 1996 median effective household buying
income in Charles County is estimated at $49,371, ranking it third in
Maryland. The DPGM has determined that the number of residential building
permits have increased yearly from 1993, when 962 permits were issued, to
1997, when 1,232 permits were issued.
St. Charles is comprised of five separate villages: Smallwood Village,
completed, Westlake Village, which has been substantially completed, Fairway
Village, currently under construction, and Piney Reach and Wooded Glen. Each
village consists of individually planned neighborhoods, and includes schools,
churches, recreation centers, sports facilities, and a shopping center. Other
amenities include parks, lakes, hiking trails and bicycle paths. St. Charles
also includes an 18-hole public golf course. Each community is planned for a
mix of residential housing, including detached homes, townhomes, multiplex
units and rental apartments. Typical lot sizes for detached homes range from
5,000 to 8,000 square feet.
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IGC's development of St. Charles as a planned unit development ("PUD") began
in 1972 when a comprehensive planned unit development for St. Charles was
approved by the County. This master plan contemplates construction of
approximately 24,730 housing units and 1,390 acres of commercial and
industrial development. As of September 30, 1997, there were approximately
11,000 completed housing units in St. Charles, including Carrington
Neighborhood which began prior to 1972 and is not included in the PUD. In
addition there are schools, recreation facilities, commercial, office and
retail space in excess of 4.2 million square feet. In St. Charles, ACPT,
through outside planners, engineers, architects and contractors, obtains
necessary approvals for land development, plans individual neighborhoods in
accordance with regulatory requirements, constructs roads, utility facilities
and community facilities. ACPT develops lots for sale for detached homes,
townhomes, apartment complexes, and commercial and industrial development.
The third village, Fairway Village, so named for the existing 18-hole public
golf course which it surrounds, is currently being developed. Its master plan
provides for 3,346 dwelling units consisting of 1,287 acres of land including
an industrial park and 40-acre commercial center.
The last two villages, Wooded Glen and Piney Reach, which include
approximately 3,000 acres, are planned for development after the completion of
Fairway Village. The total number and mix of residential units must be
approved by the County Commissioners before development can begin on these two
villages and there can be no assurances that the total of 24,730 units in the
master plan can be attained.
GOVERNMENT APPROVALS
The St. Charles master plan has been incorporated in Charles County's
comprehensive zoning plan. In addition, the Charles County government has
agreed to provide sufficient water and sewer connections for the balance of
the housing units to be developed in St. Charles. Specific development plans
for each village in St. Charles is subject to approval of the County Planning
Commission. Such approvals have previously been received for the villages of
Smallwood, Westlake and Fairway. Approvals have not yet been sought on the
final two villages.
COMPETITION
Competition among residential communities in Charles County is intense.
Currently, there are approximately 30 subdivisions competing for new home
buyers within five miles of St. Charles. The largest competing housing
developments are Kingsview, a 640 unit project being developed by Miller &
Smith, Southwinds, a 367 unit project being developed by Washington Homes, and
Chapman's Landing, a 576 unit project being developed by Legend Properties.
Smaller projects are being developed by more than 20 other developers. This is
the result of several major national and regional homebuilders having been
attracted by the growing marketplace. According to DPGM, Charles County
residential building permits have increased yearly from 1993, with 962 in
1993, 964 in 1994, 965 in 1995, 1,090 in 1996 and 1,232 in 1997. In this very
price sensitive market, IGC attempts to position St. Charles to provide among
the lowest priced building lots and homes while offering more amenities than
the competition. ACPT intends to continue this strategy.
ENVIRONMENTAL IMPACT
Management of ACPT believes that the St. Charles master plan can be
completed with respect to ACPT's properties without material adverse
environmental impact and in compliance with governmental regulations. In
preparation for immediate and future development, Phase I Environmental Site
Assessments have been prepared for substantially all of the undeveloped
parcels. The historical use of the land has been farming and forestry and no
significant environmental concerns were found. Jurisdictional determinations
for wetlands have been approved by the Corps for Sheffield Neighborhood, the
next phase of residential development containing 1,642 dwelling units.
Management has developed an Environmental Policy Manual and has established an
Environmental Review Committee and an Environmental Compliance Officer to
anticipate environmental impacts and avoid regulatory violations. However,
development can be delayed while plans are being reviewed by local, state and
federal agencies for environmentally sensitive areas.
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<PAGE>
As a result of the Restructuring, the property held by ACPT in St. Charles
will not be subject to the wetlands litigation of IGC. See "The
Restructuring--Reasons for the Restructuring."
Parque Escorial.
ACPT, indirectly through American Land, IGP Group and IGP will hold LDA,
which in 1989 acquired the 431 acre site of the former El Comandante Race
Track. The master plan for Parque Escorial was approved in 1992 and
contemplates the construction of 2,700 dwelling units of various types on 312
acres and the development of 120 acres for commercial, office and light
industrial uses. LDA has developed and sold 119 acres, and continues to own
312 acres of developed and undeveloped land at this site which has been
established as the planned community of Parque Escorial. Parque Escorial is
located approximately six miles from the central business district in San
Juan, Puerto Rico.
Development of Parque Escorial began in 1994 with the sale of 61 acres of
commercial land to Wal-Mart. The second phase is now being designed for a
480,000 square feet shopping center on the tract. Wal-Mart and Sam's Club
stores, each consisting of 125,000 square feet, opened in 1995. An additional
12 acres of commercial land have been sold subsequently by LDA for prices up
to $1.1 million per acre. Residential development began in 1996 after
contracts for 516 housing units were settled. The first 216 of these units
will be "walk-up" condominiums built and sold by a joint venture that will be
50% owned by IGP Group.
GOVERNMENT APPROVALS
Parque Escorial's master plan has been approved but specific site plans are
subject to planning commission review and approval. LDA has secured agreements
with the Puerto Rico Aqueduct and Sewer Authority to provide for adequate
water and sewer capacity for the first 1,400 units, which includes the
commercial space.
ACPT believes that in addition to developing commercial land for sale,
opportunities exist for ACPT to develop commercial rental properties in Puerto
Rico. In late 1997, LDA, the owner of Parque Escorial, formed a partnership to
construct and lease to the State Insurance Fund of Puerto Rico a 150,000
square foot office facility on a 7.2 acre parcel in Parque Escorial.
COMPETITION
The scarcity of developable land in the San Juan metropolitan area creates a
favorable market for home sales at Parque Escorial. Competition for home sales
is expected primarily from small scale condominium projects in areas
considered to be similar or less desirable than Parque Escorial. Furthermore,
it is one of only two master planned communities currently under development
in the San Juan metropolitan area. The other is the 500-acre Encantada, which
is marketed toward higher income homebuyers. Parque Escorial's home prices
appeal primarily to entry level purchasers. In addition, Encantada's developer
is building all the homes in the community, while Parque Escorial features
four separate homebuilders in its first phase, providing more selections for
the consumer.
ENVIRONMENTAL IMPACT
Management of IGC believes that the Parque Escorial master plan can be
completed without material adverse environmental impact and in compliance with
government regulations. All of the necessary agencies have endorsed Parque
Escorial's environmental impact statement. Wal-Mart has provided mitigation
for 11.87 acres of wetlands impacted by its development of the shopping center
site and other land.
COMMERCIAL RENTAL PROPERTIES.
LDA also owns a parcel of land of approximately 540 acres adjacent to the El
Comandante Race Track in Canovanas, Puerto Rico. At present, LDA is evaluating
the viability of developing and/or leasing the land for a fully integrated
entertainment complex consisting of movie studios, an amphitheater with a
capacity of 20,000,
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and an amusement park. With respect to land only, LDA has acquired all
necessary zoning approvals, utilities endorsements and approvals for
infrastructure for development of all sites. Approvals for building
construction have not yet been obtained. On June 3, 1998, LDA entered into an
agreement pursuant to which LDA will construct and lease movie studio
facilities to an entity specializing in renting such facilities. Portions of
the land may also be developed for residential use if commercial development
or leasing is not feasible.
PROPERTY MANAGEMENT.
ACPT, indirectly through its subsidiary American Management, will own and
operate the United States property management business currently operated by
IGC. In connection with this business, American Management will earn fees from
the management of 4,176 rental apartment units, including 2,246 units owned by
the U.S. Apartment Partnerships. Management fees for the U.S. apartment
properties are based on a percentage of rents ranging from 2.5% to 10.4%. The
management contracts for these properties have terms of one or two years and
are customarily renewed upon expiration but may be terminated on 30 days
notice by either party. Management fees for other apartment properties range
from 2.5% to 3.5% of rents.
In addition, IGP will earn fees from the management of 2,653 rental
apartment units owned by the 9 Puerto Rico Apartment Partnerships. Management
fees for the apartment properties owned by the Puerto Rico Apartment
Partnerships, like those in the U.S., are based on a percentage of rents
ranging from 2.25% to 7.5% and the management contracts for these properties
have terms of one or two years and are customarily renewed upon expiration.
IGP also is entitled to receive up to an aggregate of $192,000 annually in
certain incentive management fees with respect to six properties owned by the
Puerto Rico Apartment Partnerships. Upon the conversion of such units to
condominiums, the number of units under management, and the corresponding
management fees, will be reduced. However, IGP would receive fees in
connection with managing the conversion process.
IGP currently manages 918 rental apartments owned by a non-profit entity
which acquired the units from IGP in 1996 under the provisions of LIHPRHA. The
management agreements for these properties expire April 1, 2001 but management
expects the agreement to be renewed for an additional five year period. In
addition, IGP manages 511 units owned by the Puerto Rico Housing Finance
Agency. These units are expected to be converted to condominiums in 1998 by
other entities under the management of IGP, which would receive a fee for its
services.
HOMEBUILDING IN PUERTO RICO.
ACPT, through IGP Group, holds a 50% interest in Escorial Builders S.E., a
Puerto Rico partnership ("Escorial Builders"), which is a construction joint
venture at Parque Escorial. The remaining interest in the joint venture is
held by an unrelated third party which is the general contractor for the
project. Escorial Builders has acquired lots at Parque Escorial on which it is
building 216 "walk-up" condominium units. Delivery of the units is expected to
occur over an 18 month period that commenced in November 1997. Escorial
Builders is not expected to develop any additional projects. However, IGP
Group, on its own or through joint ventures, may construct additional projects
if an appropriate opportunity arises.
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES.
The following is a discussion of ACPT's policies with respect to investment
in real estate, affiliate transactions and certain other activities. ACPT's
policies with respect to these activities have been established by the ACPT
Board of Trustees and may be amended or revised from time to time at the
discretion of the ACPT Board of Trustees without a vote of the Shareholders.
No assurance can be given that ACPT's investment objectives will be attained
or that the value of ACPT will not decrease.
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Investment Policies.
Investments in Real Estate or Interests in Real Estate
ACPT's primary business objective is to maximize Shareholder value by
investing, holding and developing assets that will generate cash available for
distribution to its Shareholders. ACPT's policy is to acquire or develop
assets where ACPT believes that opportunities exist for acceptable investment
returns in areas that utilize the expertise of its management, primarily
community development and commercial and residential rental properties.
ACPT may also participate with other entities in property ownership, through
joint ventures or other types of common ownership. Equity investments may be
subject to existing mortgage financing and other indebtedness which have
priority over the equity interests of ACPT.
Investment in Real Estate Mortgages
While ACPT intends to emphasize equity real estate investments, it may, in
its discretion, invest in mortgages or other real estate interests consistent
with its general business strategy. ACPT may also invest in participating or
convertible mortgages if the ACPT Board concludes that ACPT and its
Shareholders may benefit from the cash flow or any appreciation in the value
of the subject property. Such mortgages are similar to equity participations.
The mortgages in which ACPT may invest may be either first mortgages or junior
mortgages and may or may not be insured by a governmental agency.
Securities of or Interests in Persons Primarily Engaged in Real Estate
Activities and Other Issuers
ACPT also may invest in securities of entities engaged in real estate
activities or securities of other issuers, including for the purpose of
exercising control over such entities.
Affiliate Transaction Policy.
ACPT has adopted a policy that it will not, without the approval of a
majority of independent Trustees, (i) acquire from or sell to any Trustee,
officer, employee, or Shareholder who owns more than 2% of the Common Shares
(an "Affiliated Shareholder") or any entity in which a Trustee, officer,
employee or Affiliated Shareholder of ACPT beneficially owns more than a 5%
interest, or any affiliate of any of the foregoing, any property or other
assets of ACPT, (ii) make any loan to or borrow from any of the foregoing
persons, or (iii) engage in any other transaction with any of the foregoing
persons.
Certain Other Policies.
ACPT intends to operate in a manner that will not subject it to regulation
under the Investment Company Act of 1940. ACPT does not intend to (i) invest
in the securities of other issuers for the purpose of exercising control over
such issuer, (ii) underwrite securities of other issuers, or (iii) actively
trade in loans or other investments.
ACPT may make investments other than as previously described, although it
does not currently intend to do so. ACPT has authority to purchase or
otherwise reacquire Common Shares or any of its other securities in the open
market or otherwise and may engage in such activities in the future. The ACPT
Board of Trustees has no present intention of causing ACPT to repurchase any
Common Shares, and any such action would be taken only in conformance with
applicable federal and state laws.
ACPT may in the future make loans to third parties, including, without
limitation, loans to joint ventures in which it participates. ACPT has not
engaged in trading, underwriting or agency distribution or sale of securities
of other issuers, and ACPT does not intend to do so in the future. ACPT's
policies with respect to such activities may be reviewed and modified from
time to time by the ACPT Board of Trustees without the vote of the
Shareholders.
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APPRAISALS
IGC has obtained appraisals of certain land assets being transferred to ACPT
and certain land assets that will be retained by IGC following the
Restructuring. The appraisal reports (the "Appraisal Reports") prepared for
these properties have been included as exhibits to the Registration Statement
of which this Proxy Statement/Prospectus is a part. The following discussion
is qualified in its entirety by reference to such Appraisal Reports.
PROPERTIES TRANSFERRED TO ACPT.
Parque Escorial Planned Community, San Juan/Carolina, Puerto Rico.
Parque Escorial consists in its entirety of 439.79 cuerdas, or 431 acres,
located south of 65th Infantry Avenue and Ramal Este Avenue in the Sabana
Llana and San Anton Wards of the municipalities of San Juan and Carolina,
Puerto Rico. Robert F. McCloskey Associates ("McCloskey Associates") appraised
the value of 202.83 cuerdas, or 198.15 acres, of saleable land of Parque
Escorial at $39,926,039 as of August 1, 1997. Subsequent to the appraisal,
five parcels of land, comprising approximately 18.52 cuerdas and appraised by
McCloskey Associates as having a total aggregate value of $9,858,500, were
sold to purchasers for $9,613,500.
McCloskey Associates employed the sales comparison approach, described
above, to determine the "as is" market value of the 198.15 acres of Parque
Escorial property under development. McCloskey Associates assumed the
completion of all infrastructure and facilities planned in connection with the
subject property and all approvals and endorsements for the development.
McCloskey Associates valued the Parque Escorial property based on an existing
five phase construction plan: Phase I--commercial center & service commercial;
Phase II, III and V--residential; and Phase IV--office park/commercial.
McCloskey Associates calculated the "as is" market value of the subject
property, inclusive of development, financing and sales costs, to be
$18,400,000 for Phase I and IV and $25,100,000 for Phase II, III, and future
development. Applying the necessary discount for present value considerations,
McCloskey Associates determined the present "as is" market value of the
subject property to be $35,900,000.
Canovanas Property, Canovanas, Puerto Rico.
The Canovanas Property consists of 559.71 cuerdas, or 542.92 acres, of
undeveloped property located south of State Road No. 3 Km. 16.2 in Canovanas,
Puerto Rico. The subject land comprises three contiguous parcels surrounding
the El Comandante racetrack. McCloskey Associates appraised the Canovanas
Property on July 2, 1995 as having a present "as is" value of $6,100,000 as of
June 30, 1995.
McCloskey Associates used the sales comparison approach to calculate the
present "as is" market value of the subject property based on its present R-I
(low density residential) zoning and verified financing terms and sales
conditions of comparable properties, and then adjusted its calculations to
reflect the characteristics of the subject property. McCloskey Associates
assessed the subject property as comprised of three separate parcels. The
adjusted comparable sales of each parcel were then reconciled into a single
value estimate for the entire subject property. The aggregate prospective
market value of the parcels was calculated to be $10,525,000. Discounting the
prospective market value of the subject property to present "as is" market
value, McCloskey Associates, calculated the value of the subject property to
be $6,100,000. McCloskey Associates report does not address the development of
this property as an entertainment complex as presently envisioned.
Smallwood Village, Westlake Village, Wooded Glen, and Piney Reach of the St.
Charles Planned Unit Development and Surrounding Environs, St. Charles, MD.
The subject property consists of remnant parcels in two completed villages
and two undeveloped villages, Wooded Glen and Piney Reach, in the St. Charles
PUD, and various surrounding environs including the Middletown Property that
were subsequently sold. The subject property comprises residential land that
includes
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finished lots, raw recorded lots, and raw acreage; industrial land that
includes finished sites and raw land; and commercial land. Wooded Glen and
Piney Reach total 3,079 acres, for which 10,000 residential units are planned.
Smail Associates, Inc. ("Smail"), appraised the property on February 14, 1997
as having an "as is" present market value of $37,190,000 as of December 31,
1996. Subsequent to the appraisal, 63 lots and 60 acres of commercial or bulk
acres appraised by Smail for a gross retail value of $4,160,000 were sold for
$5,200,000.
Smail employed the sales comparison approach to estimate the retail value of
finished single-family and townhouse lots, an apartment site on the subject
property, all raw acreage, and commercial and industrial land parcels. Smail
applied the subdivision analysis method to calculate the "as is" market value
of 60 finished single-family lots in the Dorchester Neighborhood of Westlake
Village, 98 remaining townhouse lots in Huntington Ridge, and finished
industrial and commercial sites on the subject property. The subdivision
analysis approach is a hybrid of the cost, sales comparison and income
approaches to valuation in which the present value of the property is
estimated by projecting periodic income from the sale of finished lots,
subtracting land development, sales, carrying costs, and profit, and
discounting the resultant periodic cash flows to provide an indication of
present value. For purposes of its appraisal, Smail identified the subject
property according to whether it was residential, industrial or commercial
land.
Fairway Village (Residential), St. Charles, MD.
Fairway Village (Residential) consists of approximately 1,287 acres of land
containing a total of 3,346 residential units to be developed in five stages
containing 837 townhouse units, 922 large single-family lots, 499 medium
single-family lots, 252 small single-family lots, and 836 apartment units
located on the east and west sides of St. Charles Parkway near its southern
terminus at White Plains Regional Park in Waldorf, Maryland. James B. Hooper,
P.A. ("Hooper") appraised the property on May 25, 1997 as having an aggregate
"as is" present market value of $19,263,000 as of that date.
Hooper employed the market data approach, a variant of the sales comparison
approach, whereby the appraiser analyses recent sales of similar properties to
estimate the value of the apartment units on the subject property. The
relevant sales are then adjusted for dissimilarities between sale properties
and the subject property to arrive at an indication of value. Using this
approach, Hooper determined the apartment units to have an overall gross
retail value of $7,524,000, which was discounted to present "as is" market
value of $3,014,000. Hooper used the market data approach to calculate the
value of the 837 townhouse units on the subject property to be $11,300,000.
This figure was then discounted to an "as is" present market value of
$4,888,000 to reflect a 16-year absorption period, sales expenses, and soft
costs. Applying the same methodology, Hooper appraised the gross retail value
of the single-family detached residence units to be $31,308,000, which was
then discounted to an "as is" present market value of $11,361,000.
Accordingly, Hooper calculated the total aggregate "as is" market value of the
subject property to be $19,263,000.
Fairway Village (Commercial), St. Charles, MD.
Fairway Village (Commercial) consists of approximately 38 acres of land,
more or less within the Sheffield and Gleneagles Neighborhoods, that has been
designated for commercial, office, and business usage within the Fairway
Village Neighborhood. Hooper appraised the property as having an aggregate "as
is" present market value of $3,960,000 as of October 31, 1997.
Hooper used the market data approach discussed above to determine the value
of the subject property. Relying on sales of comparable properties, and then
adjusting the data to reflect relevant dissimilarities with the subject
property, Hooper estimated the gross retail value of the property to be
$8,276,000. Hooper then discounted the gross retail value based on an initial
3-year carrying period and an anticipated 4-year absorption period once sales
commence. Hooper employed a discount factor of 14% for the 3-year holding
period, which, along with a discount for the absorption period, generated an
"as is" market value of $3,960,000.
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<PAGE>
PROPERTIES RETAINED BY IGC.
Brandywine Village, Brandywine, MD.
SCA is the general partner of, and holds a 50% interest in, Brandywine
Investment Associates, L.P., which owns Brandywine Village, a 277 acre tract
of land in Brandywine, Prince George's County, Maryland. The property was
acquired in 1985 and comprises two approved comprehensive design zones that
permit residential, retail commercial, office commercial and light industrial
uses. The Gatewood Company, Inc. ("Gatewood") appraised the property on June
30, 1997 as having a total undiscounted prospective value of $11,900,000,
which, when discounted to present "as is" market value, produced an estimated
market value of $8,885,000 as of June 9, 1997. Pursuant to the terms of the
partnership agreement, SCA is entitled to a recovery of its advances, a
priority return and 50% of the remaining cash flow. Accordingly, IGC's
indirect interest in the Brandywine property has an appraised "as is" value of
$8,885,000 as of June 9, 1997.
Gatewood employed the sales comparison approach to calculate present "as is"
market value whereby value is determined by comparison of sales of reasonably
similar properties to the subject properties. Gatewood also assumed that final
approvals for the construction of 234 lots and a local access road would be
obtained by developers within one year. Five separate property components were
identified by Gatewood based on applicable zoning restrictions: 8.53 acres
commercial; 64.74 acres medium density residential; 7.87 acres high density
residential; and 46 acres office/light industrial. The sales comparison
approach produced an aggregate undiscounted value of $11,900,000, which was
then discounted to a present "as is" market value of $8,885,000 to reflect the
time and costs required to support marketability, e.g., local infrastructure,
and a 10% discount rate.
Southlake at Montclair Subdivisions Section S-4, Dumfries, VA.
Section S-4 of Southlake at Montclair Subdivision consists of 77 raw,
recorded townhouse lots located along the east side of South Lake Boulevard
north of its intersection with Waterway Drive in the Southlake Montclair
planned community in Dumfries, Virginia. NBValuation Group, Inc. ("NBV")
appraised Section S-4 as having a total undiscounted prospective value of
$1,925,000, which, when discounted to present "as is" market value, produced
an estimated market value of $620,000 as of May 12, 1997.
NBV employed the developmental or anticipated use method whereby the present
"as is" market value of property is based on an estimate of the gross sell-out
of the subject lots on a finished, retail basis. The total of all direct and
indirect costs necessary to complete the land development required in order to
market the finished lots on a retail basis, in addition to all holding period
expenses that may reasonably be anticipated in connection with the development
and marketing process, are deducted from the estimated sale proceeds. Further,
the methodology takes into account absorption, related holding period costs
and anticipated profit. NBV assumed that Section S-4 would produce 77 finished
townhouse lots.
Westbury, Phase II Section I, Lexington Park, MD.
Westbury, Phase II Section I comprises 26.992 acres of undeveloped land off
the north side of Pegg Road and Westbury Boulevard West in Lexington Park,
Maryland. Brick House Realty, Inc. ("Brick House") appraised the property on
May 30, 1997 as having a total undiscounted prospective market value of
$1,632,000 based on a proposed 51-lot subdivision on the property. Brick House
discounted this figure to a present "as is" market value of $348,813 as of May
20, 1997. Brick House, on request, further appraised the property as recorded
but undeveloped "paper lots" to be worth $678,000, and the value of the
subject property "as is" raw land to be worth $250,000.
Brick House employed the sales comparison approach discussed above to
determine present "as is" market value of the subject property. Brick House
estimated an average of $32,000 per lot for the 51 potential lots determined
from comparison to sales of reasonably similar type properties in the area.
Brick House calculated an aggregate prospective market value of $1,632,000,
which was then discounted to $348,813 to reflect the time expected to sell all
lots, the carrying cost during the sellout period, the marketing expense,
developer's profit, other completion costs, and a 13% discount rate.
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<PAGE>
Pomfret Property, Waldorf, MD.
The Pomfret Property comprises 812.2 acres of land designated for
residential low density development located on the southern and northern sides
of Pomfret Road. The total assemblage is broken down into a Northern Section,
which contains 202.79 acres, and the Southern Section, which contains 609.38
acres. Smail appraised the property on February 14, 1997 as having a present
"as is" market value of $3,250,000 as of December 31, 1996.
Smail used the sales comparison approach using the most comparable data to
arrive at a projected "as is" market value estimate per land use for the
Pomfret Property. Under this approach, recent sales of similar properties are
analyzed and each sale adjusted to reflect pertinent dissimilarities with the
subject property, including cash equivalency, market conditions, and other
factors warranting adjustment. Smail then calculated the net present value of
the projected income stream over the estimated lot sellout period based on the
retail value of finished lots, the projected absorption of finished lots, and
deductions representing the installation of infrastructure, costs of sales,
administrative costs, real estate taxes and an appropriate entrepreneurial
profit. Smail concluded that development of these parcels was not feasible at
that time and that the property should be held over for future development.
Smail, after making the appropriate adjustments, valued each acre at $4,000 to
yield an aggregate "as is" market value of $3,250,000 for the entire Pomfret
Property.
26 Single Family Lots, Dorchester Village, St. Charles, MD.
Smail appraised the value of these 26 lots on February 16, 1997 as having a
gross retail value of $1,296,000 as of December 31, 1996.
THE COMMERCIAL PARCEL
Parcels A-3 & A-4, Westlake Village, St. Charles, MD.
Parcels A-3 & A-4 consist of 14 acres of commercial land located in the
horseshoe created by Smallwood Drive West and St. Patricks Drive immediately
west of St. Charles Regional Mall. Both parcels abut O'Donnell Lake to the
east. Smail appraised the value of the parcels on February 14, 1997 as having
a gross retail value of $4,214,000 as of December 31, 1996. As part of the
Asset Transfers, IGC conditionally has agreed to transfer these parcels to
American Land if and when IGC settles the wetlands litigation on terms
approved by the Board of Directors of IGMC, provided that IGC shall have
received confirmation that the transfer of the parcels (and resulting decrease
in the value of IGC's assets) will not cause the IGC Units to be delisted from
AMEX or the PSE. If IGC is unable to settle the wetlands litigation on
satisfactory terms or IGC does not receive confirmation of the continued
listing of IGC Units, IGC also will retain these parcels.
GENERAL.
The appraisers of the properties described above generally made a number of
assumptions, including that the title was marketable and that the properties
were free and clear of all liens and encumbrances (except certain mortgages
thereon), and in compliance with applicable building, environmental, zoning
and similar laws. In preparing their Appraisal Reports, the appraisers relied
upon operating, financial and other information provided by IGC and other
sources. The appraisers assumed the legal description of the parcel given to
the appraiser was correct, and the completion of any proposed improvements in
a workmanship-like manner within a reasonable period of time. The appraiser
assumed that there were no latent defects or unapparent conditions of the
property, subsoil or structures. Information and data supplied to the
appraiser by others were assumed to be from reliable sources.
Care should be exercised in evaluating the conclusions of the Appraisal
Reports. An appraisal is only an estimate of value and should not be relied
upon as a measure of realizable value. As with any appraisal, methods and
assumptions used by the appraisers in preparing the Appraisal Reports were
those that the appraisers, in their professional judgment, concluded were
appropriate. There can be no assurance, however, that such assumptions
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<PAGE>
will materialize or that other or different methods or assumptions might not
be appropriate. Moreover, the current appraised value of the property is not a
prediction of the value that the property may have at any time in the future.
Future values of property will depend on a variety of factors, including the
economic success of the property, the impact of inflation on property values,
local competitive circumstances and general economic conditions.
LEGAL PROCEEDINGS
ACPT.
None.
IGC.
Wetlands Litigation.
In 1994, the U.S. Attorney for the District of Maryland ("U.S. Attorney")
commenced a federal grand jury investigation regarding actions by IGC in
developing certain parcels in St. Charles, Maryland. The parcels were
identified by the U.S. Army Corps of Engineers (the "Corps") as wetlands
within its regulatory jurisdiction. In October 1995, the grand jury issued an
indictment charging IGC, SCA and IGC's Chairman, James J. Wilson, with four
felony and four misdemeanor counts of violations of Section 404 (wetlands) of
the U.S. Clean Water Act. The charges related to discharge of fill materials
into wetlands within the Corps' regulatory jurisdiction without a permit. The
violations charged were to have occurred on four parcels totaling
approximately 50 acres out of the approximately 4,400 acres IGC had developed
in St. Charles. At the same time, the U.S. Attorney filed a civil action
charging nine separate civil violations of the U.S. Clean Water Act with
respect to the four parcels involved in the criminal action and one additional
parcel. The civil action was dismissed without prejudice, and thus may be
refiled.
On February 29, 1996, IGC, SCA and Mr. Wilson were convicted in the U.S.
District Court for the District of Maryland (the "District Court") on the four
felony counts. On June 17, 1996, Mr. Wilson was sentenced to 21 months
imprisonment, one year of supervised release and a $1,000,000 fine. IGC and
SCA were fined $2,000,000 and $1,000,000, respectively, placed on probation
for five years and ordered to implement a wetlands restoration and mitigation
plan, which IGC's engineers estimate would cost $2,000,000 to $3,000,000. IGC
paid the aggregate $3,000,000 in fines on behalf of itself and SCA. The
Wetlands Properties subject to this litigation are being retained by IGC which
will remain responsible for restoration and mitigation costs. As a result of
the conviction, the Wetlands Properties were encumbered by an obligation to
impose a conservation easement.
On December 23, 1997 a three judge panel of the U.S. Court of Appeals for
the Fourth Circuit (the "Appeals Court") reversed the convictions of IGC, SCA
and Mr. Wilson and remanded the matter to the District Court for a new trial.
On January 26, 1998 the three-judge panel denied the U.S. Attorney's petition
for rehearing. On February 28, 1998 the government returned the fine that IGC
had paid.
In reversing the convictions, the Appeals Court voided regulations that
defined "waters of the United States" to include intrastate wetlands that
could affect interstate commerce. However the appellate decision did not
foreclose a determination upon retrial that IGC's Wetlands Properties are
"waters of the United States" because they are "adjacent" to "navigable
waters" within the meaning of the Clean Water Act. Other courts have construed
"adjacent" to mean "reasonably proximate" or "closely related." IGC's Wetlands
Properties are over 9 miles from the nearest "navigable waters."
The ultimate outcome of this litigation remains uncertain. Representatives
of the U.S. Attorney's office have stated publicly that the government intends
to retry the criminal case.
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Counsel for IGC is currently engaged in negotiations with the U.S.
Attorney's office on a possible disposition of the Wetlands litigation that
would require payment of a fine by IGC, remediation of a portion of two
parcels in St. Charles and IGC's undertaking an environmental compliance
program. IGC would also plead guilty to a single felony count. All other
criminal charges in the indictment against IGC and its president, James J.
Wilson, would be dropped. The foregoing settlement proposal has not as yet
been agreed upon by either IGC or the U.S. Government, and there are a number
of issues that are still under discussion. If agreement is reached, the
disposition must be approved by the court. Management believes that the cost
of such a settlement would not be materially greater than the amount ($1.5
million) reserved by IGC for the Wetlands litigation. A portion of the land in
St. Charles presently encumbered by the Wetlands litigation would become
available for development if such a settlement is reached.
Other Litigation.
St. Charles has been zoned as a planned unit development that allows
construction of approximately 24,730 housing units and 1,390 acres of
commercial and industrial development. The County has agreed to provide
sufficient sewer and water connections for all housing units remaining to be
developed in St. Charles. IGC and SCA are involved in litigation with the
County regarding (1) the level of sewer and water fees that may be imposed and
(2) the level of school construction impact fees that may be imposed. In
addition, IGC and SCA are asserting claims against the County for the
repayment of excessive sewer and water fees and school construction impact
fees paid by them in the past.
The sewer and water litigation is entitled St. Charles Associates Limited
Partnership, et al. v. County Commissioners of Charles County, et al., No. 89-
720, Circuit Court for Charles County, Maryland. That litigation was filed in
June 1989 and is continuing. The litigation originally sought a court ruling
that the County was not entitled to impose sewer and water fees at the then-
existing level upon residential units in the St. Charles Communities. That
aspect of the litigation was settled by a Settlement Agreement dated November
1989, which was confirmed in a Consent Decree entered in March 1990.
Subsequent aspects of the litigation have resulted from disputes over the
interpretation of the Settlement Agreement and Consent Decree. The principal
issues that are presently being contested between the county, IGC, and SCA are
(1) whether a study procured by the County in 1996 justifies the level of
sewer and water connection fees which it imposes upon the St. Charles
Communities; (2) whether SCA and IGC are entitled to an injunction against
future excessive sewer and water fees; and (3) to what degree SCA and IGC are
entitled to recover what they regard as excessive sewer and water fees they
have paid in the past. The Circuit Court has ruled in SCA and IGC's favor that
the County's 1996 study did not comply with the applicable restrictions and
that SCA and IGC are entitled to an injunction against future excessive sewer
and water fees. The Court further ruled that SCA and IGC must pursue claims
for excess sewer and water fees paid in the past in Maryland's Tax Court. The
Court's rulings are on appeal to Maryland's Court of Special Appeals. SCA has
commenced an action in Maryland Tax Court, which is a State administrative
agency, to recover what it regards as excessive sewer and water fees that have
been paid in the past. That case is titled St. Charles Associates Limited
Partnership, et al. v. Charles County, et al., No. 1205, and was filed in
February 1997.
SCA's and IGC's claims for the refund of excessive school impact fee claims
paid to the County in the past are being pursued in the Maryland Tax Court as
well, in actions entitled St. Charles Associates Limited Partnership, et al.
v. County Commissioners of Charles County, et al., Case Nos. 961 (filed March
1994), 1038 (filed October 1994), and 98-MI-0083 (filed February 6, 1998). In
those cases SCA and IGC are seeking both repayment of past excessive school
impact fees paid to the County and a ruling as to the nature of their rights
to credits against school impact fees for school sites that they have donated
to the County.
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IGC CONSOLIDATED FINANCIAL DATA
The audited consolidated financial statements of IGC as of December 31, 1997
and 1996 and for the years then ended and the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in IGC's Annual Report on Form 10-K for the year ended December 31,
1997 (the "IGC 10-K") and Form 10-Q for the quarter ended March 31, 1998 are
incorporated herein by reference. The IGC 10-K and 10-Q are attached as Annex
1 to this Proxy Statement/Prospectus.
The Selected Financial and Operating Data of IGC have been derived from the
consolidated financial statements of IGC incorporated herein by reference and
should be read in conjunction therewith.
The unaudited Pro Forma Consolidated Financial Data of IGC reflects IGC and
its continuing businesses subsequent to the Restructuring and the Distribution
for the three months ended March 31, 1998 and for the year ended December 31,
1997, as if the Restructuring and the Distribution had been completed January
1, 1997 and as if the Restructuring and the Distribution were in effect as of
such date. The Pro Forma Consolidated Financial Data of IGC are unaudited and
provided for informational purposes only and do not purport to be indicative
of the results that actually would have been obtained if the Restructuring and
the Distribution had been effected on the dates indicated or of the results
that may be obtained in the future.
87
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA OF
INTERSTATE GENERAL COMPANY L.P.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
----------------- -------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data
Revenues
Land sales (a)........ $ 5,992 $ 1,449 $ 13,357 $ 14,717 $ 14,824 $ 22,296 $ 13,809
Home sales............ 2,030 1,895 7,805 9,715 10,826 20,265 21,884
Investment in gaming
properties........... -- -- -- 4 (78) 7,288 2,358
Equity in earnings
from partnerships
and development
fees................. 505 396 1,494 16,530 2,647 4,941 3,279
Apartment rental
revenues............. 2,209 2,158 8,737 7,577 4,642 4,538 2,113
Management and other
fees................. 976 1,343 3,775 4,816 3,894 3,507 4,493
Interest and other
income............... 246 146 1,044 1,015 945 687 1,395
-------- -------- -------- -------- -------- -------- --------
Total revenues....... 11,958 7,387 36,212 54,374 37,700 63,522 49,331
Provision for wetlands
litigation expenses... -- -- 1,772 973 4,107 498 --
Other expenses......... 10,576 7,020 37,419 39,922 35,108 52,872 42,973
Income taxes........... 335 112 606 3,634 1,452 3,511 (835)(2)
Net income (loss)...... 1,047 255 (3,585) 9,845(1) (2,967) 6,641 7,193 (2)
Basic net income
(loss) per unit....... .10 .02 (.35) .95(1) (.29) .65 .71 (2)
Cash distributions per
unit.................. -- -- -- .11 -- .10 --
(a) Includes sales to
affiliates............ -- -- 3,000 9,086 3,233 -- --
Balance Sheet Data
Assets related to
community
development........... $ 79,677 $ 82,599 $ 82,509 $ 83,085 $ 79,558 $ 70,061 $ 78,876
Assets related to
investment
properties............ 45,733 52,888 47,291 52,698 36,722 35,608 42,707
Assets related to home
building projects..... 2,553 2,355 2,573 2,491 3,819 4,998 7,566
Total assets......... 139,619 147,077 145,038 148,568 132,093 123,513 140,314
Debt related to
community development
Recourse............... 29,535 32,538 35,176 34,077 47,841 36,661 50,137
Non-recourse........... 2,324 2,212 2,295 2,153 2,034 4,268 2,762
Debt related to
investment properties
Recourse............... 918 1,098 969 1,139 1,322 1,559 1,857
Non-recourse........... 38,995 39,409 39,101 39,508 22,650 22,771 22,457
Debt related to
homebuilding
Recourse............... 211 284 159 502 981 2,398 3,320
Total liabilities...... 95,284 100,228 101,750 101,974 94,184 82,808 108,069
Partners' equity....... 44,335 46,849 43,288 46,594 37,909 40,705 32,245
Book value per Unit.... 4.25 4.52 4.15 4.50 3.66 3.94 3.17
</TABLE>
- --------
(1) Includes a $932,000 or $.09 per Unit reduction for the extraordinary item-
early extinguishment of debt.
(2) Includes a $1,500,000 or $.15 per Unit benefit for the cumulative effect
of a change in accounting principle to reflect the adoption of SFAS No.
109 "Accounting for Income Taxes".
88
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------- ---------------------------------------
1998 1997 1997 1996 1995 1994 1993
------ ------ ------- ------- ------- ------- -------
(UNAUDITED) (IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data
Community Development
Residential lots sold... 200 23 250 523 134 228 295
Residential lots used by
Company's homebuilding
operations............. -- -- 5 27 25 44 91
Residential lots
transferred to joint
venture operations..... -- -- 118 98 -- -- --
Residential lots
transferred to
Company's rental
property operations.... -- -- -- -- 54 -- 56
Commercial and business
park acres sold......... 31 9 17 5 20 76 12
Undeveloped acres sold... -- -- 381 -- 2 20 27
Homebuilding, all
locations
Contracts for sale, net
of cancellations....... 33 16 73 67 133 134 232
Number of homes sold.... 35 25 112 156 190 200 216
Backlog at end of
period................. 74 65 58 68 92 86 152
Rental apartment units
managed at end of
period.................. 8,139 8,139 8,139 8,139 8,085 8,085 8,029
Units under
construction............ -- -- -- -- 54 -- 56
</TABLE>
QUARTERLY SUMMARY (UNAUDITED)
IGC's quarterly results are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues.......................... $7,387 $10,809 $ 7,174 $10,842 $36,212
Income (loss) before taxes and
minority interest................ 415 1,763 (246) (4,472) (2,540)
Net income (loss) as previously
reported......................... 255 1,798 (808) (4,830) (3,585)
Adjustment for Coachman's Landing
(1).............................. -- (576) -- 576 --
Adjustment for spin-off costs
(2).............................. -- -- (300) 300 --
Net income (loss) as revised...... 255 1,222 (1,108) (3,954) (3,585)
Basic earnings per Unit as
previously reported:
Net income (loss)................ .02 .18 (.08) (.47) (.35)
Basic earnings per Unit as
revised:
Net income (loss)................ .02 .12 (.10) (.39) (.35)
</TABLE>
- --------
(1) Adjustment made in the fourth quarter for Coachman's Landing is to reverse
gain recorded on sale of a portion of IGC's investment in Coachman's
Landing.
(2) Adjustment made in the fourth quarter for spin-off costs is to expense
spin-off costs which were capitalized as start-up costs during the
quarter.
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<PAGE>
INTERSTATE GENERAL COMPANY L.P. ("IGC")
PRO FORMA CONSOLIDATED STATEMENT OF (LOSS) INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO
IGC RECLASSIFICATION IGC FORMA
HISTORICAL ENTRIES RECLASSIFIED ACPT(D) IGC(E)
---------- ---------------- ------------ ------- ------
<S> <C> <C> <C> <C> <C>
REVENUES
Community
development--land
sales................ $ 5,992 $ -- $ 5,992 $5,961 $ 31
Homebuilding--home
sales................ 2,030 -- 2,030 -- 2,030
Equity in earnings
from partnerships and
developer fees....... 505 43 (B) 548 505 43
Rental property
revenues............. 2,209 -- 2,209 2,209 --
Management and other
fees, substantially
all from related
entities............. 976 -- 976 976 --
Interest and other
income............... 246 184 (C) 430 137 293
------- ------ ------- ------ ------
Total revenues...... 11,958 227 12,185 9,788 2,397
------- ------ ------- ------ ------
EXPENSES
Cost of land sales.... 3,504 151 (C) 3,655 3,608 47
Cost of home sales.... 1,834 -- 1,834 -- 1,834
Selling and
marketing............ 333 -- 333 21 312
General and
administrative....... 1,695 -- 1,695 1,600 95
Interest expense...... 866 57 (C) 923 910 13
Rental properties
operating expense.... 896 -- 896 896 --
Depreciation and
amortization......... 493 -- 493 471 22
Spin-off costs........ 757 -- 757 757 --
------- ------ ------- ------ ------
Total expenses...... 10,378 208 10,586 8,263 2,323
------- ------ ------- ------ ------
INCOME BEFORE PROVISION
FOR INCOME TAXES AND
MINORITY INTEREST...... 1,580 19 1,599 1,525 74
PROVISION FOR INCOME
TAXES.................. 335 -- 335 283 52
------- ------ ------- ------ ------
INCOME BEFORE MINORITY
INTEREST............... 1,245 19 1,264 1,242 22
MINORITY INTEREST....... (198) (43)(B) (241) (241) --
------- ------ ------- ------ ------
NET (LOSS) INCOME....... $ 1,047 $ (24) $ 1,023 $1,001 $ 22
======= ====== ======= ====== ======
BASIC NET INCOME PER
SHARE.................. $ .10 $ -- $ .10 $ .19 $ --
======= ====== ======= ====== ======
WEIGHTED AVERAGE SHARES
OUTSTANDING............ 10,332 10,332 10,332 5,218 10,332
======= ====== ======= ====== ======
</TABLE>
The accompanying notes are an integral part of this pro forma consolidated
statement of income.
90
<PAGE>
INTERSTATE GENERAL COMPANY L.P. ("IGC")
PRO FORMA CONSOLIDATED STATEMENT OF (LOSS) INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO
IGC RECLASSIFICATION IGC FORMA
HISTORICAL ENTRIES RECLASSIFIED ACPT(D) IGC(E)
---------- ---------------- ------------ ------- -------
<S> <C> <C> <C> <C> <C>
REVENUES
Community develop-
ment--land sales..... $13,357 $ 105 (A) $13,462 $13,165 $ 297
Homebuilding--home
sales................ 7,805 -- 7,805 -- 7,805
Equity in earnings
from partnerships and
developer fees....... 1,494 161 (B) 1,655 1,509 146
Rental property reve-
nues................. 8,737 -- 8,737 8,737 --
Management and other
fees, substantially
all from related
entities............. 3,775 -- 3,775 3,775 --
Interest and other in-
come................. 1,044 716 (C) 1,760 943 817
------- ------ ------- ------- -------
Total revenues...... 36,212 982 37,194 28,129 9,065
------- ------ ------- ------- -------
EXPENSES
Cost of land sales.... 8,881 71 (A) 9,139 8,494 645
187 (C)
Cost of home sales.... 7,486 (23)(A) 7,463 -- 7,463
Selling and market-
ing.................. 1,232 -- 1,232 127 1,105
General and adminis-
trative.............. 7,034 -- 7,034 6,607 427
Interest expense...... 3,609 270 (C) 3,879 3,820 59
Rental properties op-
erating expense...... 3,597 -- 3,597 3,597 --
Depreciation and amor-
tization............. 2,128 -- 2,128 1,850 278
Wetlands litigation
expenses............. 1,772 -- 1,772 -- 1,772
Write-off of deferred
project costs........ 6 -- 6 6 --
Write-off of good-
will................. 1,843 -- 1,843 -- 1,843
Spin-off costs........ 1,164 -- 1,164 1,164 --
------- ------ ------- ------- -------
Total expenses...... 38,752 505 39,257 25,665 13,592
------- ------ ------- ------- -------
(LOSS) INCOME BEFORE
PROVISION FOR INCOME
TAXES AND MINORITY
INTEREST............... (2,540) 477 (2,063) 2,464 (4,527)
PROVISION FOR INCOME
TAXES.................. 606 -- 606 470 136
------- ------ ------- ------- -------
(LOSS) INCOME BEFORE
MINORITY INTEREST...... (3,146) 477 (2,669) 1,994 (4,663)
MINORITY INTEREST....... (439) (161)(B) (600) (600) --
------- ------ ------- ------- -------
NET (LOSS) INCOME....... $(3,585) $ 316 $(3,269) $ 1,394 $(4,663)
======= ====== ======= ======= =======
BASIC NET (LOSS) INCOME
PER SHARE.............. $ (.35) .03 $ (.32) $ .27 $ (.45)
======= ====== ======= ======= =======
WEIGHTED AVERAGE SHARES
OUTSTANDING............ 10,289 10,289 10,289 5,196 10,289
======= ====== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of this pro forma consolidated
statement of income.
91
<PAGE>
INTERSTATE GENERAL COMPANY L.P. ("IGC")
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1998
(IN THOUSANDS) (UNAUDITED)
<TABLE>
<CAPTION>
RECLASSI- PRO
IGC FICATION IGC FORMA
HISTORICAL ENTRIES RECLASSIFIED ACPT (D) IGC (E)
---------- --------- ------------ -------- -------
<S> <C> <C> <C> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS
Unrestricted............. $ 3,234 $ -- $ 3,234 $ 2,126 $ 1,108
Restricted............... 2,136 -- 2,136 2,002 134
-------- ------ -------- -------- -------
5,370 -- 5,370 4,128 1,242
-------- ------ -------- -------- -------
ASSETS RELATED TO COMMUNITY
DEVELOPMENT
Land and development
costs
Puerto Rico............ 30,877 1,325(C) 32,202 32,202 --
St. Charles, Maryland.. 29,124 -- 29,124 22,437 6,687
Other United States lo-
cations............... 15,197 -- 15,197 -- 15,197
Notes receivable on lot
sales and other,
substantially all due
from affiliates......... 4,479 -- 4,479 3,604 875
-------- ------ -------- -------- -------
79,677 1,325 81,002 58,243 22,759
-------- ------ -------- -------- -------
ASSETS RELATED TO RENTAL
PROPERTIES
Operating properties,
net..................... 37,860 314(B) 38,174 38,174 --
Investment in
unconsolidated rental
property partnerships... 7,015 -- 7,015 7,015 --
Other receivables, net... 858 -- 858 665 193
-------- ------ -------- -------- -------
45,733 314 46,047 45,854 193
-------- ------ -------- -------- -------
ASSETS RELATED TO
HOMEBUILDING
Homebuilding construction
and land................ 1,598 -- 1,598 -- 1,598
Investment in joint ven-
ture.................... 853 -- 853 853 --
Receivables and other.... 102 -- 102 -- 102
-------- ------ -------- -------- -------
2,553 -- 2,553 853 1,700
-------- ------ -------- -------- -------
OTHER ASSETS
Receivables, deferred
costs regarding waste
technology and other pro-
jects and other......... 5,218 6,956(C) 12,174 1,782 10,392
Property, plant and
equipment, net.......... 1,068 -- 1,068 423 645
-------- ------ -------- -------- -------
6,286 6,956 13,242 2,205 11,037
-------- ------ -------- -------- -------
TOTAL ASSETS........... $139,619 $8,595 $148,214 $111,283 $36,931
======== ====== ======== ======== =======
</TABLE>
The accompanying notes are an integral part of this pro forma consolidated
balance sheet.
92
<PAGE>
INTERSTATE GENERAL COMPANY L.P. ("IGC")
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
LIABILITIES AND PARTNERS'
CAPITAL
RECLASSI- PRO
IGC FICATION IGC FORMA
HISTORICAL ENTRIES RECLASSIFIED ACPT (D) IGC (E)
---------- --------- ------------ -------- -------
<S> <C> <C> <C> <C> <C>
LIABILITIES RELATED TO
COMMUNITY DEVELOPMENT
Recourse debt............ $ 29,535 $6,956(C) $ 36,491 $ 34,128 $ 2,363
Non-recourse debt........ 2,324 -- 2,324 2,324 --
Accounts payable, accrued
liabilities and deferred
income.................. 4,582 -- 4,582 4,444 138
-------- ------ -------- -------- -------
36,441 6,956 43,397 40,896 2,501
-------- ------ -------- -------- -------
LIABILITIES RELATED TO
RENTAL PROPERTIES
Recourse debt............ 918 -- 918 918 --
Non-recourse debt........ 38,995 -- 38,995 38,995 --
Accounts payable and
accrued liabilities..... 3,663 314 3,977 3,067 910
-------- ------ -------- -------- -------
43,576 314 43,890 42,980 910
-------- ------ -------- -------- -------
LIABILITIES RELATED TO
HOMEBUILDING
Recourse debt............ 211 -- 211 -- 211
Accounts payable, accrued
liabilities
and deferred income...... 2,196 -- 2,196 -- 2,196
-------- ------ -------- -------- -------
2,407 -- 2,407 -- 2,407
-------- ------ -------- -------- -------
OTHER LIABILITIES
Accounts payable and
accrued liabilities..... 5,893 -- 5,893 3,467 2,426
Notes payable and capital
leases.................. 604 -- 604 145 459
Accrued income tax
liability-current....... 2,454 -- 2,454 2,452 2
Accrued income tax
liability-deferred...... 3,909 -- 3,909 3,491 418
-------- ------ -------- -------- -------
12,860 -- 12,860 9,555 3,305
-------- ------ -------- -------- -------
TOTAL LIABILITIES...... 95,284 7,270 102,554 93,431 9,123
-------- ------ -------- -------- -------
PARTNERS' CAPITAL...... 44,335 1 ,325(C) 45,660 17,852 27,808
-------- ------ -------- -------- -------
TOTAL LIABILITIES AND
PARTNERS' CAPITAL..... $139,619 $8,595 $148,214 $111,283 $36,931
======== ====== ======== ======== =======
</TABLE>
The accompanying notes are an integral part of this pro forma consolidated
balance sheet.
93
<PAGE>
INTERSTATE GENERAL COMPANY L.P. ("IGC")
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL DATA
(A) Land sales occurred during the year ended December 31, 1997, as IGC's land
business sold lots to its homebuilding business. Gross profit on these
sales, historically eliminated in consolidation, has been included in IGC
and ACPT's historical results for these periods based upon the estimated
fair market value of the land (based on comparable sales to third
parties).
(B) As of March 31, 1998 and during the first quarter of 1998 and the year
ended December 31, 1997, the investment in the four rental properties are
eliminated upon consolidation. Sixty percent of the general partners'
interest in these partnerships will remain in IGC until one year and one
day after the Restructure, at which time they will be transferred to ACPT.
IGC will not consolidate these partnerships, creating a need to reclassify
sixty percent of the general partners' investment from operating assets
and the applicable minority interest expense to equity in earnings from
unconsolidated subsidiaries. The basis in the general partners interest is
negative and further reclassified to accrued liabilities.
(C) As of March 31, 1998 and during the first quarter of 1998 and the year
ended December 31, 1997, an intercompany note receivable and intercompany
debt existed between IGC and LDA. Interest income and expense and the note
receivable and payable amounts, historically eliminated in consolidation,
have been included in IGC's and ACPT's historical results.
(D) Reflects the registration, initiation of operations, and distribution of
all Common Shares of American Community Properties Trust ("ACPT"). ACPT,
which was formed on March 17, 1997, is expected to carry out the
restructuring of IGC. IGC expects to transfer its principal operations to
ACPT's subsidiaries and distribute to the partners of IGC, including its
Unitholders, all the Common Shares of ACPT.
(E) Column balances equal "IGC Reclassified" column balances less "ACPT"
column balances. IGC's remaining operations include the U.S. homebuilding
business, waste technology business, land subject to the wetlands
litigation and certain other parcels of land.
94
<PAGE>
IGC AFTER THE RESTRUCTURING
NO CHANGE IN PARTNERSHIP STRUCTURE.
After the Restructuring, IGC will remain a publicly-traded limited
partnership under the existing Partnership Agreement. No amendments to the
Partnership Agreement are being made as a part of the Restructuring. IGC's
executive offices are located at 222 Smallwood Village Center, St. Charles,
Maryland 20602.
MANAGEMENT OF IGC.
IGMC will continue as the managing general partner of IGC after the
Restructuring, and James J. Wilson will continue as the Chairman of the Board
of IGMC and the Chief Executive Officer of IGC. Except for Donald Blakeman,
following the Distribution, no Trustee or officer of ACPT will serve as a
director or officer of IGMC. Consequently, J. Michael Wilson, Thomas Wilson,
Thomas Shafer, Edwin Kelly, Paul Resnik, Eduardo Cruz Ocasio, Carlos R.
Rodriguez and Francisco Arrivi Cros, who currently are directors and/or
officers of IGMC and who are or will be Trustees and/or officers of ACPT will
resign from their positions at IGC prior to the Distribution. Donald Blakeman
will remain as director of IGMC until an independent director has been
recruited, at which time Mr. Blakeman intends to resign. Following the
Distribution, the directors of IGMC, in addition to James Wilson, will be Mark
Augenblick, Donald G. Blakeman, and Thomas Shafer, and the principal executive
officers of IGC will be James Wilson, and Mark Augenblick.
Following the Restructuring, Mark Augenblick will serve as president and
chief operating officer of IGC, and will continue to serve as a director,
chairman and chief executive officer of AFH, CWT and IWT, and as a director of
IGMC. Mark Augenblick presently serves as a vice chairman of IGC, as well as
chairman and chief executive officer of AFH, CWT and IWT. Mr. Augenblick will
receive an annual base salary of $400,000, annual directors' fees, various
employment-related bonuses, and 70,000 common shares in IWT and CWT subject to
forfeiture in the event of early termination of his employment contract.
DESCRIPTION OF IGC'S CONTINUING BUSINESS.
After the Restructuring, IGC will continue to own the Retained Assets, which
in management's view do not fit ACPT's business plan. These assets include the
Wetlands Properties, the LDA Note, all of the shares of AFH, certain single
family home lots in the Dorchester neighborhood in St. Charles, an indirect
50% interest in Brandywine Investment Associates L.P., which owns land in
Brandywine, Maryland, a 100% interest in Pomfret LLC, which owns land in
Pomfret, Maryland, the Westbury land, Chastleton and Coachman's L.P. and the
beneficial interest in the CWT Trust. As part of the Asset Transfers, IGC
conditionally has agreed to transfer these parcels to American Land if and
when IGC settles the wetlands litigation on terms approved by the Board of
Directors of IGMC, provided that IGC shall have received confirmation that the
transfer of the parcels (and resulting decrease in the value of IGC's assets)
will not cause the IGC Units to be delisted from AMEX or the PSE. If IGC is
unable to settle the wetlands litigation on satisfactory terms or IGC does not
receive confirmation of the continued listing of IGC Units, IGC also will
retain these parcels. Management of IGC believes that the Retained Assets will
enable IGC to continue significant operations following the Distribution. As a
result of the wetlands conviction, the Wetlands Properties were encumbered by
an obligation to impose a conservation easement that would prohibit
development. The easement was never recorded and the wetlands conviction was
reversed. However, the matter has been remanded for a new trial and as a
practical matter, the Wetlands Properties remain undevelopable until the
wetlands litigation is finally resolved. IGC will also retain, until limited
partner consents are obtained, the general partnership interests in nine
apartment partnerships in order to avoid a tax termination under the Code.
Real Estate Development.
BRANDYWINE
SCA, in which IGC holds a 99% interest, owns a 50% interest in Brandywine
Investment Associates L.P., a Maryland limited partnership. Brandywine
Associates owns Brandywine Village, a 277 acre tract in Prince
95
<PAGE>
George's County, Maryland. The property currently is in the planning,
engineering and approval phase, and consists of two approved comprehensive
design zones that permit residential, retail commercial, office commercial and
light industrial uses. The value of IGC's interest in Brandywine Village has
been appraised at $8,885,000 as of June 9, 1997.
POMFRET
IGC holds a 100% interest in Pomfret LLC, which owns an 812 acre tract in
Charles County, Maryland. The site, which currently is in the planning phase,
is zoned for low density residential use, which would permit 812 one-acre home
sites or up to 1,420 single family detached units with a central sewer system.
The value of IGC's interest in the Pomfret land has been appraised at
$3,250,000 as of December 31, 1996.
WESTBURY
IGC owns approximately 340 lots for residential use in the master planned
community of Westbury in St. Mary's County, Maryland. IGC's holdings consist
of 38 townhome and 54 single family lots that currently are under development,
plus an additional 250 lots that have been approved for single family use that
IGC anticipates will be developed over the next several years. The value of
IGC's interest in 51 of the Phase II single family lots has been appraised at
$210,000 as of May 20, 1997.
ST. CHARLES PARCEL
IGC currently owns an approximately 14 acre parcel adjacent to the St.
Charles Towne Center that is currently zoned for commercial development (the
"Commercial Parcel"). The parcel has been appraised as having a gross retail
value of $4,214,000 as of December 31, 1996. As part of the Asset Transfers,
IGC conditionally has agreed to transfer to American Land the Commercial
Parcel if and when IGC settles the wetlands litigation on terms approved by
the Board of Directors of IGMC, provided that IGC shall have received
confirmation that the transfer of the Commercial Parcel (and resulting
decrease in the value of IGC's assets) will not cause the IGC Units to be
delisted from AMEX or the PSE. If IGC is unable to settle the wetlands
litigation on satisfactory terms or IGC does not receive confirmation of the
continued listing of IGC Units, IGC also will retain the Commercial Parcel.
DORCHESTER
IGC owns 26 single family home lots in the Dorchester neighborhood of St.
Charles. The lots have been appraised at $48,000 per lot as of December 31,
1996.
WETLANDS PROPERTIES
As a result of the wetlands conviction, the Wetlands Properties were
encumbered by an obligation to impose a conservation easement that would
prohibit development. The easement was never recorded and the wetlands
conviction was reversed. However, pending final resolution of the wetlands
litigation, as a practical matter, the Wetlands Properties may not be
developed. The Wetlands Properties include the Towne Center South land in St.
Charles, which prior to the wetlands litigation was held by IGC for commercial
development.
Interstate Waste Technologies; CWT Trust.
Following the Distribution, IGC plans to continue the development and
expansion of the waste treatment facility development business currently
conducted by IWT. All of the outstanding stock of IWT and of CWT will be
contributed to the CWT Trust. Before contributing CWT and IWT to the CWT
Trust, IGC will capitalize these entities with (i) a third party note
receivable in the amount of $1.06 million resulting from the sale by IGC of 53
single family lots in the Montclair neighborhood of Prince William County,
Virginia, (ii) 77 townhome lots in the Montclair neighborhood with an
estimated value of $700,000 to $1 million, and (iii) $1 million of cash. IGC's
objective is to establish the waste treatment business in a single viable
operating company that can
96
<PAGE>
be sold or spun off as a separate company to IGC Unitholders in the future.
CWT has been invited by the government of the Caribbean nation of St. Maarten
to submit a proposal for the development of a waste treatment facility that
would use IWT's innovative waste disposal and conversion technology.
American Family Homes.
Management of IGC intends to seek a buyer, merger candidate or strategic
investing partner for AFH. However, there can be no assurance that any such
transaction will be consummated on terms acceptable to IGC. In the interim,
AFH will continue its homebuilding activities in Virginia, North Carolina and
South Carolina.
LISTING OF IGC UNITS.
Management of IGC believes that the assets retained by IGC after the
Distribution will enable IGC to continue significant operations, and permit
the continued listing of the IGC Units on the AMEX and the PSE. The AMEX has
considered the matter and advised that following the Restructuring it expects
the IGC Units to meet the criteria for continued AMEX listing. To increase the
post-Restructuring trading price of IGC Units immediately following the
Distribution, IGC will implement a 1 for 5 reverse Unit split.
CREDITORS RIGHTS.
If, in a lawsuit by an unpaid creditor or representative of creditors of
IGC, such as a trustee in bankruptcy, a court were to find that, at the time
IGC made the Distribution, IGC (i) was insolvent, (ii) was rendered insolvent
by reason of the Distribution, (iii) was engaged in a business or transaction
for which IGC's assets constituted unreasonably small capital, or (iv)
intended to incur, or believed that it would incur, obligations beyond its
ability to pay such obligations as they matured, such court could void the
Distribution as a fraudulent transfer or conveyance and require recipients of
Common Shares to return them (or equivalent amounts) to IGC or to a fund for
the benefit of its creditors.
As described below, IGC's management believes that following the
Distribution IGC will be solvent, will have sufficient capital for carrying on
its business and will be able to pay its obligations, including those related
to the wetlands litigation, as they become due. There can be no assurance,
however, that a court would value IGC's assets on the same basis to determine
whether IGC was insolvent at the time of, or after giving effect to, the
Distribution, or that, regardless of the method of valuation, a court would
not determine that IGC was insolvent at such time, that it was engaged in a
business for which its remaining assets constituted unreasonably small capital
or that IGC was generally unable to pay its obligations as they became due.
In addition, the Delaware Act prohibits limited partnerships from making
distributions to limited partners to the extent that, after giving effect to
such distribution, certain liabilities of the partnership exceed the fair
value of its assets. The Delaware Act further provides that recipients of a
distribution who knew at the time of such distribution that such distribution
violated the Delaware Act are liable to the partnership for the amount of the
distribution. However, limited partners receiving an unlawful distribution who
were unaware at the time of such distribution that it was unlawful are not
liable to the partnership. IGC's management believes that after giving effect
to the Distribution, IGC's liabilities will not exceed the fair value of its
assets and therefore that the Distribution will not violate the Delaware Act.
97
<PAGE>
MANAGEMENT OF ACPT
ACPT BOARD OF TRUSTEES.
The business and affairs of ACPT will be managed under the direction of the
Board of Trustees. At the effective time of the Restructuring, the Board of
Trustees will have four members, all of whom will be persons who will be
employees of ACPT or a member of the Wilson Family. In addition, two other
persons who will not be employees of ACPT or any affiliated company or a
member of the Wilson Family have agreed to serve as Trustees beginning
immediately after the completion of the Restructuring.
Pursuant to the terms of the Declaration of Trust, the Trustees are divided
into three classes. One class will hold office initially for a term expiring
at the annual meeting of Shareholders to be held in 1999, a second class will
hold office initially for a term expiring at the annual meeting of
Shareholders to be held in 2000, and a third class will hold office initially
for a term expiring at the annual meeting of Shareholders to be held in 2001.
At each annual meeting of Shareholders, the successors to the class of
Trustees whose terms expire at that meeting will be elected to hold office for
a term continuing until the annual meeting of Shareholders held in the third
year following the year of their election and the election and qualification
of their successors. See "Certain Provisions of Maryland Law and ACPT's
Declaration of Trust and Bylaws."
ACPT TRUSTEES AND EXECUTIVE OFFICERS.
The following table sets forth certain information with respect to the
persons who will be the Trustees and the executive officers of ACPT at the
effective time of the Restructuring and the persons who have agreed to serve
as Trustees immediately following the completion of the Restructuring.
Additional biographical information follows the table. All executive officers
are elected by the Board of Trustees and may be removed, with or without
cause, at the discretion of the Board of Trustees. Management is considering
adding up to two additional independent trustees.
<TABLE>
<CAPTION>
NAME AGE POSITION TERM EXPIRES
---- --- -------- ------------
<S> <C> <C> <C>
J. Michael Wilson....... 32 Trustee, Chairman and Chief Executive 2001
Officer
Edwin L. Kelly.......... 56 Trustee, President and Chief Operating 2000
Officer
Francisco Arrivi Cros... 53 Trustee, Executive Vice President and 1999
Treasurer
Donald G. Blakeman...... 66 Trustee(1) 1999
Thomas Shafer........... 68 Trustee(1) 2001
Thomas B. Wilson........ 36 Trustee 2000
Paul A. Resnik.......... 50 Senior Vice President and Secretary
Eduardo Cruz Ocasio..... 52 Vice President and Assistant Secretary
</TABLE>
- --------
(1) To become Trustees immediately following completion of the Restructuring.
J. MICHAEL WILSON has been a Director of IGMC since December 1996 and in
January 1997 was named its Vice Chairman, Secretary, and Chief Financial
Officer of IGC. He has been President and Chief Operating Officer of IBC since
1994 and a Director since 1991. He served as Vice President of IBC from 1991
to 1994. He has been a director of Wilson Securities Corporation since 1991,
and President since March 1996. He was Vice President of Wilson Securities
Corporation from 1991 to 1996. He has been Vice President of IWT since 1994.
He served as Real Estate Finance Division Loan Administrator for Chase
Manhattan Bank in New York from 1989 to 1991. He graduated from Manhattan
College, New York with a degree in Business Finance in 1989. He is the brother
of Thomas B. Wilson.
EDWIN L. KELLY was named President and Chief Operating Officer of IGMC and
IGC in January 1997. He previously served as Senior Vice President and
Treasurer of IGC and Senior Vice President of IGMC since their formation in
1986. He has served in various executive positions with IGC and its
predecessor companies since 1974, including as a Director of IGMC from 1986 to
present. Prior to joining Interstate, he was a manager in the Consulting
Division of Arthur Andersen & Co.
98
<PAGE>
FRANCISCO ARRIVI CROS was Senior Vice President of IGC from 1990 to 1996 and
since 1997 has been Executive Vice President of IGC. He was named as a
director of IGMC in April 1997. He also has served as President of IGP since
1996. Before joining IGC, he was Vice President of The Chase Manhattan Bank
N.A. in Puerto Rico from 1977 to 1990, and manager of its Real Estate Finance
Division from 1985 to 1990.
DONALD G. BLAKEMAN has been a Director of IGMC since its inception in 1986.
He served as Executive Vice President of IGMC and IGC from 1986 to 1996. He
was Secretary of IGMC from 1990 to 1995. He served in various executive
positions with IGC and its predecessor companies from 1968 to 1996. In
connection with those roles he resigned as an officer of IGC in August 1996.
He was named President of Equus and Equus Management Company ("EMC") in
January 1996, and served until his retirement in December 1998. He served as a
Director of EMC until his retirement in May 1998.
THOMAS SHAFER is a registered Professional Engineer specializing in real
estate evaluation and land development. He was a partner of Whitman, Requardt
and Associates, LLP ("Whitman Requardt"), an engineering and architectural
firm, since 1976 and its managing partner since 1989. He retired from the
Whitman, Requardt firm effective December 31, 1997. Mr. Shafer serves on the
Business Advisory Committee of Mayor Kurt Schmoke of Baltimore and as the
President and Chairman of the Board of the Charles Village Community Benefits
District and the Charles Village Community Foundation, Inc. Mr. Shafer is a
member of the Urban Land Institute, the National Society of Professional
Engineers and the American Water Works Association. His firm has provided
engineering services to IGC in connection with the St. Charles development for
thirty years.
THOMAS B. WILSON has been a Director of IGMC since December 1995. He has
been a Vice President of IBC since 1994. From 1994 to 1998, he was President
of El Comandante Operating Company, Inc. ("ECOC"), which leased El Comandante
Race Track in Puerto Rico from a subsidiary of Equus. Since January 1998, he
has served as Chairman, Chief Executive Officer, and President of Equus and
EMC. He is the brother of J. Michael Wilson.
PAUL A. RESNIK has been Senior Vice President of IGC since 1993 and Vice
President of IGMC since 1989. He served as Vice President of IGC from 1987 to
1993. From 1986 to 1987 he was Vice President of Multi-Management, Inc., a
property management and real estate development company in Cleveland, Ohio.
From 1978 to 1986 he was General Manager of Naiman Development Company, a
developer of commercial properties and property management company in
Cleveland, Ohio.
EDUARDO CRUZ OCASIO has been Vice President and Assistant Secretary of IGMC
since June of 1997. He has also been Vice President of IGC since 1991 and
Assistant Treasurer since 1987. He has served in various positions with IGC
and its predecessor companies since 1971, including Comptroller of IGP from
1977-1990.
COMMITTEES OF THE ACPT BOARD OF TRUSTEES.
Following the Restructuring, the Board of Trustees will have the following
committees:
Audit Committee.
The Audit Committee will consist of no fewer than two members, each of whom
will be an Independent Trustee. The responsibilities of the Audit Committee
will include making recommendations concerning the engagement of independent
public accountants, reviewing with the independent public accountants the
plans for and results of the annual audit engagement, approval of any other
professional services provided by the independent public accountants, approval
of the fees paid to the independent public accountants for audit and non-audit
services, and periodically reviewing, with the assistance of the independent
public accountants, the adequacy of ACPT's internal accounting controls.
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Compensation Committee.
The Compensation Committee will consist of no fewer than two members, each
of whom will be an Independent Trustee. The Compensation Committee will be
responsible for the administration of the Share Incentive Plan and for
approving the compensation of the executive officers of ACPT.
Nominating Committee.
The Board of Trustees does not have a standing committee for the
recommendation of nominees for election to the Board of Trustees. This
function is performed by the entire Board of Trustees.
COMPENSATION OF ACPT TRUSTEES.
Trustees that will not receive salaries from ACPT will receive directors'
fees established by the Board of Trustees. Initially, these Trustees will be
compensated at a rate of $5,000 per quarter, $1,400 per meeting and out of
pocket travel reimbursements for meeting attendance. Trustees who are not
employees of ACPT also are eligible to receive Share-based incentive
compensation under the Trustees Share Plan described below.
EXECUTIVE COMPENSATION.
The following table sets forth the estimated annualized base salary expected
to be paid following the Restructuring to each of ACPT's executive officers:
<TABLE>
<CAPTION>
NAME POSITION ESTIMATED ANNUAL BASE SALARY
- ---- -------- ----------------------------
<S> <C> <C>
J. Michael Wilson....... Chairman, Chief Executive Officer $ 90,000
Edwin L. Kelly.......... President, Chief Operating Officer $275,000
Francisco Arrivi Cros... Executive Vice President, Treasurer $275,000
Paul Resnik............. Senior Vice President and Secretary $200,000
Eduardo Cruz Ocasio..... Vice President $115,000
All Executive Officers as a Group $955,000
</TABLE>
Subsequent to completion of the Restructuring ACPT intends to adopt one or
more incentive plans for its key employees in addition to the Share Incentive
Plan described below.
EMPLOYMENT AGREEMENTS.
Each of Messrs. Kelly and Resnik will enter into an employment agreement
(the "Employment Agreements") with American Management, and Mr. Arrivi with
IGP, to become effective on the date of the Distribution. The Employment
Agreement of Messrs. Kelly and Arrivi will replace employment agreements that
they currently have with IGC. Pursuant to the Employment Agreements, Mr. Kelly
will serve as President and Chief Operating Officer and will be paid an annual
base salary of $275,000, Mr. Arrivi will serve as Executive Vice President and
will be paid an annual base salary of $275,000, and Mr. Resnik will serve as
Senior Vice President and will be paid an annual base salary of $200,000. The
Employment Agreements will provide for salary raises at the discretion of the
Board of Trustees. Each of the Employment Agreements will continue in effect
until the death or resignation of the executive or his termination by American
Management or IGP.
Under the terms of the Employment Agreements, if the executive's employment
with American Management is terminated by American Management other than for
"cause" (as defined in the Employment Agreement), or is terminated by the
executive for "good reason" (as defined in the Employment Agreement) the
terminated executive will be entitled to continue to receive his base salary
for 24 months following the date of termination.
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SHARE INCENTIVE PLANS.
ACPT has adopted the 1997 Share Incentive Plan (the "Share Incentive Plan")
and the 1997 Trustee Share Incentive Plan (the "Trustee Share Plan") to
provide for Common Share-based incentive compensation for officers, key
employees and Trustees. The Share Incentive Plan and the Trustee Share Plan
will be substantially similar to the existing plans of IGC. The summaries of
the Share Incentive Plan and Trustee Share Plan set forth below are qualified
in their entirety by reference to the text of the Plans, copies of which have
been filed as exhibits to the Registration Statement of which this Proxy
Statement/Prospectus is a part.
Employee Plan.
Under the Share Incentive Plan, the Compensation Committee of the Board of
Trustees may grant to key employees the following types of Share-based
incentive compensation awards ("Awards"): (i) options to purchase a specified
number of Common Shares ("ACPT Options"), (ii) forfeitable Common Shares that
vest upon the occurrence of certain vesting criteria ("Restricted Shares"), or
(iii) Share Appreciation Rights ("ACPT Rights") that entitle the holder to
receive upon exercise an amount payable in cash, Common Shares or other
property (or any combination of the foregoing) equal to the difference between
the market value of Common Shares and a base price fixed on the date of grant.
A total of 208,000 Common Shares has been reserved for issuance under the
Share Incentive Plan.
The Share Incentive Plan authorizes the Compensation Committee to determine
the exercise price and manner of payment for ACPT Options and the base price
for ACPT Rights. The Compensation Committee also is authorized to determine
the duration and vesting criteria for Awards, including whether vesting will
be accelerated upon a change in control of ACPT.
Rights of key employees under Awards are not transferable other than to
immediate family members or by will or the laws of intestate succession.
Trustees Plan.
The Trustee Share Plan authorizes the Board of Trustees, in its discretion,
to grant to eligible Trustees Awards of the same types and terms of Awards as
provided under the Share Incentive Plan. Only Trustees who are not employees
of ACPT or any affiliated company are eligible to receive Awards under the
Trustee Share Plan. A total of 52,000 Common Shares have been reserved for
issuance under the Trustee Share Plan.
TREATMENT OF IGC OPTIONS AND UNIT APPRECIATION RIGHTS.
In connection with the Distribution, holders of options to purchase IGC
Units ("IGC Options") which have been awarded prior to the Distribution Date,
whether or not such IGC Options have vested, will receive ACPT Options to
purchase one Common Share for every two IGC Options. Likewise, holders of IGC
Unit Appreciation Rights ("IGC Rights") awarded prior to the Distribution
Date, whether vested or not, will receive one ACPT Right for every two IGC
Rights. Holders of IGC Rights or Options will not be required to pay any
additional consideration for, and will not be required to surrender or
exchange their IGC Rights or Options to obtain such ACPT Rights or Options.
Any ACPT Options or Rights issued in respect of IGC Options or Rights that
have not vested at the time of the Distribution will vest at the same time as
the corresponding IGC Options or Rights.
Consequently, the following Trustees and officers of ACPT who currently hold
IGC Options or Rights will be issued the following number of ACPT Options or
Rights in connection with the Distribution: Francisco Arrivi Cros--5,000 ACPT
Options and 45,000 ACPT Rights; Paul Resnik--25,000 ACPT Rights; and Edwin L.
Kelly--20,000 ACPT Rights.
The exercise price for each such ACPT Option, or the base price for each
such ACPT Right, as the case may be, will be equal to (a) the exercise price
of the IGC Options or base price of the IGC Rights in respect of which such
ACPT Options or Rights were issued, multiplied by (b) the percentage obtained
by dividing (i) the
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average closing price of Common Shares on the AMEX for the 20 trading days
immediately following, but not including, the Distribution Date (the "ACPT
Average") by (ii) the sum of (A) the ACPT Average and (B) the average closing
sale price of IGC Units on the principal exchange on which they are traded,
or, if not traded on an exchange, in the over-the-counter market, for the 20
trading days immediately following, but not including, the Distribution Date
(the "IGC Average") multiplied by two. In addition, the exercise price or base
price of each such IGC Option or Right will be adjusted to equal (a) such
exercise price or base price, multiplied by (b) the percentage obtained by
dividing (i) two times the IGC Average by (ii) the sum of (A) two times the
IGC Average and (B) the ACPT Average.
The costs associated with the adjusted IGC Rights and Options following the
Distribution will continue to be borne by IGC, and the cost associated with
the ACPT Rights and Options issued will be borne by ACPT.
RETIREMENT PLANS.
In connection with the Restructuring, all of the current employees of IGC
(except employees of AFH, IWT, CWT, Mark Augenblick and James J. Wilson) will
become employees of American Management. American Management will continue and
assume all of IGC's obligations under the retirement savings plan currently
maintained by IGC (the "Retirement Plan"). Employees are generally eligible to
participate when they complete one year of service. The Retirement Plan is a
defined contribution plan which provides for contributions by American
Management for the accounts of eligible employees in amounts equal to 4% of
base salaries and wages not in excess of the U.S. Social Security taxable wage
base, and 8% of salaries (limited to $150,000) that exceeded that wage base.
Eligible employees also may make voluntary contributions to their accounts and
self- direct the investment of their account balances in various investment
funds that may be selected under the plan.
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OWNERSHIP OF COMMON SHARES
The following table sets forth certain information with regard to the
beneficial ownership of IGC Units as of June 30, 1998 and the projected
beneficial ownership of Common Shares after giving effect to the Restructuring
based on beneficial ownership of IGC Units as of June 30, 1998, by: (i) each
person who beneficially owns more than 5% of the outstanding IGC Units or
would beneficially own more than 5% of the outstanding Common Shares, (ii)
each Trustee and each named executive officer of ACPT, (iii) each director and
named executive officer of IGMC, (iv) all Trustees and executive officers of
ACPT as a group and (v) all directors and executive officers of IGMC as a
group. Except as otherwise indicated, each person named in the table will have
sole voting and sole investment power with respect to all of the Common Shares
shown as beneficially owned by such person.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
-------------------------------
NUMBER OF NUMBER OF
NAME OF BENEFICIAL OWNER IGC UNITS COMMON SHARES PERCENT
- ------------------------ --------- ------------- -------
<S> <C> <C> <C>
J. Michael Wilson(2).......................... 215,495 107,747 2.08
Edwin L. Kelly................................ 111,214 55,607 1.07
Francisco Arrivi Cros(3)...................... 10,000 5,000 *
Donald G. Blakeman............................ 373,884 186,944 3.61
Thomas Shafer................................. -- -- *
Thomas B. Wilson.............................. 172,795 86,397 1.67
Paul Resnik................................... 10,000 5,000 *
Eduardo Cruz Ocasio........................... -- -- *
All Trustees and executive officers of ACPT as
a group (8 persons)(2)(3).................... 893,393 446,697 8.67
Mark Augenblick............................... -- -- *
James J. Wilson(4)............................ 30,579 15,289 *
All Directors and executive officers of IGMC
as a group (11 persons)(2)(3)................ 967,728 483,864 9.35
Bessemer Interstate Corporation...............
245 Peachtree Center Avenue #804
Atlanta, GA 30303 522,208 261,104 5.04
Interstate Business Corporation...............
222 Smallwood Village Center
St. Charles, MD 20602(5)(6) 3,080,515 1,540,257 29.75
Wilson Securities Corporation.................
222 Smallwood Village Center
St. Charles, MD 20602(5) 1,172,203 586,101 11.32
</TABLE>
- --------
* less than 1%
(1) The beneficial ownership of IGC Units and Common Shares is determined on
the basis of IGC Units directly and indirectly owned by directors and
executive officers of IGMC and Trustees and executive officers of ACPT and
IGC Units to be issued to such persons under options which are exercisable
within the next 60 days. The percentage of ownership is based on the
aggregate number of IGC Units outstanding as of June 30, 1998, plus all
IGC Units issuable upon exercise of options within the next 60 days, for a
total of 10,354,185. At a distribution ratio of one to two, the number of
Common Shares expected to be outstanding immediately following the
Distribution is approximately 5,200,000. The total number of outstanding
ACPT shares does not reflect the results of the Private Offering.
(2) Includes 42,700 IGC Units (.42%) attributable to IGC Units held by the
Wilson Family Limited Partnership, a partnership for which J. Michael
Wilson serves as a general partner.
(3) Includes IGC Units subject to options exercisable under the IGC Employees
Plans of 10,000 for Francisco Arrivi Cros.
(4) Includes 100 IGC Units (0%) held by his wife, Barbara A. Wilson.
(5) Owned by certain members of the Wilson Family, including J. Michael Wilson
and Thomas B. Wilson.
(6) Includes 50,000 IGC Units (25,000 ACPT shares) gifted to EMC.
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TRANSACTIONS WITH RELATED PARTIES
STAGGERED TRANSFER OF PARTNERSHIP INTERESTS TO AMERICAN HOUSING
Prior to the Distribution IGC will not have completed the transfer to
American Housing of portions of IGC's general partnership interests in nine
U.S. Apartment Partnerships. These transfers will be deferred to permit IGC to
obtain limited partner consents or to avoid certain of the partnerships from
triggering a tax termination pursuant to Section 708 of the Code. The
partnership interests temporarily retained by IGC until consent of a majority
of limited partners can be obtained will be:
Essex Apartment Associates Limited Partnership--a 1% general partnership
interest
Bannister Associates Limited Partnership--a 5% general partnership
interest
Brookside Gardens Limited Partnership--a 1% general partnership interest
Crossland Associates Limited Partnership--a 5% general partnership
interest
Huntington Associates Limited Partnership--a 1% general partnership
interest.
IGC will use its best efforts to obtain limited partner consent for such
transfers as soon as practicable. Pending such consent, IGC will assign to
American Housing the beneficial interest in Bannister, Brookside Gardens, and
Crossland and any distributions received from Essex and Huntington to the
extent that such distributions would not disqualify American Rental as a REIT.
Any distributions received by IGC from Essex and Huntington that cannot be
assigned to American Housing will be assigned to American Land.
The partnership interests temporarily retained by IGC to avoid a technical
termination of the partnership under Section 708 of the Code will be:
Headen House Associates Limited Partnership--a .6% general partnership
interest
Palmer Apartments Associates Limited Partnership--a .6% general
partnership interest
Wakefield Terrace Associates Limited Partnership--a .6% general
partnership interest
Wakefield Third Age Associates Limited Partnership--a .6% general
partnership interest.
IGC will transfer its retained interest in these Apartment Partnerships on
the first anniversary of the Distribution. Prior to that time IGC will retain
the economic benefits associated with the retained interests.
ACPT will indemnify and hold IGC harmless from any liability to any third
party arising after the initial transfer of partnership interests that might
be imposed upon IGC in its capacity as a general partner of any of the nine
Apartment Partnerships in which it temporarily retains an interest.
CONSULTING AGREEMENT.
American Management will enter into a consulting and retirement compensation
agreement with IGC's founder and Chief Executive Officer, James J. Wilson, to
become effective on the date of the Restructuring (the "Consulting
Agreement"). The Consulting Agreement will provide for annual cash payments
during the first two years of $500,000 and annual cash payments for eight
years thereafter of $200,000. However, if Mr. Wilson dies or ACPT is sold
during the term of the Consulting Agreement, the agreement provides for a lump
sum payment equal to the lesser of $400,000 or the aggregate of annual
payments then payable under the agreement. During the Consulting Agreement
term, Mr. Wilson will remain available to provide consulting services
requested from time to time by the Board of Trustees including strategic
planning and transaction advisory services. Pursuant to the Consulting
Agreement, American Management will reimburse the reasonable costs and
expenses incurred by Mr. Wilson in providing requested consulting services.
The Consulting Agreement would remain in effect in the event that Mr. Wilson
is convicted of any charges related to the wetlands litigation. Mr. Wilson is
the father of J. Michael Wilson and Thomas B. Wilson.
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BANC ONE FINANCING.
On September 19, 1997, IGC refinanced substantially all of its U.S. land
development recourse indebtedness pursuant to a Master Loan Agreement dated
August 1, 1997 by and among IGC, ACPT, St. Charles Community LLC and Banc One.
To date approximately $14 million in proceeds of this $20 million facility
were used as follows: $6.8 million to satisfy existing indebtedness to
NationsBank, $1.7 million to pay Puerto Rico income tax, $2.5 million for
various accounts payable, and initially $3 million to pay in full the wetlands
fine that was subsequently refunded to IGC. In addition, the Banc One facility
provides for up to $4 million in community development financing for Fairway
Village, and $2 million for payment of wetlands remediation expenses.
The loan bears interest at prime plus 2.5% and requires semi-annual
principal payments of $1 million during the first year and $1.5 million
thereafter until maturity at the end of the seventh year. The loan is secured
by substantially all of IGC's assets, excluding (with the exception of one 14
acre land parcel in St. Charles) the assets that will remain in IGC following
the Restructuring. During the first 3 years of the loan, Banc One is generally
entitled to receive 50% of the net sales proceeds of any collateral as a
mandatory principal curtailment with the percentages increasing to 60% in
years 4 and 5, 70% in year 6, and 80% in year 7. The loan with Banc One
requires additional interest payments on each annual anniversary date. The
amount due is 1% of the outstanding balance in 1998 and 1999, and increases
1/2% each year thereafter, through 2003.
In connection with the loan, IGC granted Banc One an option to purchase
150,000 IGC Units at an exercise price of $3.0016 per unit. During any year
that the loan remains outstanding, IGC is required to grant Banc One 75,000
additional options with an exercise price equal to the lesser of the Strike
Price or the market price on the date of grant.
Following the Restructuring, and upon approval of Banc One, ACPT will assume
the obligation to grant options. IGC will remain liable to Banc One for
outstanding indebtedness but will be released from its other covenant
obligations. Pursuant to the Service Agreement, ACPT will indemnify and hold
harmless IGC from any liability under the Banc One loan.
JOINT LITIGATION WITH CHARLES COUNTY.
In connection with the land transfers, SCA has assigned to ACPT its rights
under the 1989 settlement agreement with Charles County. However, with respect
to pending litigation to enforce the settlement agreement, SCA has retained
its claim for any monetary damages for excess sewer connection fees and impact
fees paid prior to the Distribution that may be awarded as a result of such
litigation. See "Legal Proceedings--IGC--Other Litigation."
SERVICES OF WHITMAN, REQUARDT.
Whitman, Requardt, an engineering and consulting firm of which Thomas Shafer
recently retired as the managing partner, has regularly performed engineering,
surveying, inspection and environmental assessment services for IGC and its
predecessors with respect to the St. Charles land assets for over 30 years and
will continue to provide such services for ACPT following the Restructuring.
Mr. Shafer will become a Trustee of ACPT upon completion of the Distribution.
Whitman, Requardt has charged IGC $300,000 for services performed in 1997, and
as of July 26, 1998, IGC owes Whitman, Requardt $175,000 for services
rendered. Following the Distribution ACPT will assume any outstanding amounts
payable to Whitman, Requardt.
NATIONSBANK LETTER OF CREDIT.
NationsBank has issued in the name of IGC a standby letter of credit in the
face amount of $4.2 million which serves as collateral for municipal bonds in
the principal amount of $4.2 million issued by a District of Columbia agency
that financed the Chastleton Apartments. IGC's obligations under the letter of
credit are secured by an assignment of certain notes payable by Brandywine
Investment Associates L.P. and by IGP's partnership interests in three Puerto
Rico Apartment Partnerships. Additional collateral has been provided by IBC
and IBC has undertaken to replace the NationsBank letter of credit with a
letter of credit secured only by assets of IBC.
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PAYMENTS TO IBC FOR SERVICES PROVIDED BY J. MICHAEL WILSON.
J. Michael Wilson, the Chairman of ACPT and President of IBC, will remain on
the payroll of IBC following the Restructuring. ACPT will reimburse IBC for
one half of Mr. Wilson's salary, up to $90,000 per year, plus the amount of
related costs, including FICA and FUTA taxes, incident to such salary.
LAND SALE TO IBC AFFILIATE.
On June 30, 1997, an affiliate of IBC purchased 374 acres for $3,000,000.
The sales price was determined based on an independent appraisal value of
$2,800,000 for the land plus the cost of engineering work provided by IGC. The
sales price was paid with a 20% down payment and a note receivable for
$2,400,000. On February 27, 1998 IBC assumed a $3,000,000 note payable due
Banco Popular in satisfaction of payables due from IBC to IGC totalling
$3,000,000 comprised of the $2,400,000 note, accrued interest thereon and
other payables. Management believes the terms of these transactions are
comparable to those that could have been negotiated with an independent third
party.
SALE OF MANAGEMENT FEE RECEIVABLES.
During the second quarter 1997, an affiliate of IBC purchased the management
fees receivable due from four apartment projects owned by affiliates of IGC or
IBC at their aggregate face value of $190,000. Management believes the sales
price of the receivable is at least as favorable to IGC than what could have
been negotiated with an independent third party which likely would have
required a discount to face value.
RECEIVABLES FROM LAND SALES TO FORMER DIRECTOR.
LDA holds three notes receivable totalling $2,131,000 due from an affiliate
of Jorge Colon Nevares, a former IGC director. Two of these notes totalling
$1,252,000 contain provisions delaying the commencement of interest until the
earlier of the completion of certain infrastructure or a specified date. The
completion of the infrastructure was delayed and the interest commencement
provisions of the notes were modified accordingly. Management believes that
the terms of this transaction are comparable to those that could be negotiated
with an independent third party.
APARTMENT MANAGEMENT SERVICES.
IGC provides management services to five apartment rental projects and two
commercial properties in which ACPT is not the general partner and IBC or an
IBC related entity holds an ownership interest. ACPT will assume these
management contracts after the Restructuring. The management contracts provide
for fees ranging from 2.5% to 3.5% of rents. Total fees in 1997 were $560,000.
Management believes that the terms of these transactions are comparable to
those that could be negotiated with an independent third party.
LDA RECEIVABLE.
IGC will retain a portion of a $9 million receivable due from LDA after the
completion of the Restructuring. The note receivable is payable from LDA's
first available cash flow determined by ACPT after debt service, cost of
operations and working capital requirements. ACPT will retain the right to
collect the first $2,400,000 paid on this note.
INCOME TAX CONSIDERATIONS
FEDERAL INCOME TAX CONSIDERATIONS.
This "Federal Income Tax Considerations" section summarizes the material
federal income tax considerations applicable to the Distribution, holding and
disposition of Common Shares. This discussion is not a complete analysis of
all the tax considerations and, in particular, does not address all aspects of
taxation that
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may be relevant to certain types of Shareholders subject to special treatment
under federal income tax laws (for example, life insurance companies, tax
exempt organizations, financial institutions, foreign corporations, and non-
resident alien individuals). This discussion and the discussions that follow
relating to certain State and Puerto Rico tax considerations do not address
the tax considerations applicable to (1) the Asset Transfers, (2) the
issuance, holding, or disposition of American Rental Preferred Shares, (3) the
issuance, holding, or disposition of ACPT Preferred Shares under the Private
Offering, or (4) the exchange of limited partnership interests held by
investors in the U.S. Apartment Partnerships or the Puerto Rico Apartment
Partnerships for limited partnership interests in American Housing or IGP
pursuant to the Exchange Offer. This discussion also does not address foreign
tax laws or any United States federal, state, or Puerto Rico tax laws other
than those pertaining to income tax. This discussion assumes that the
Shareholders will hold their Units and the Common Shares as capital assets
within the meaning of Section 1221 of the Code. Except as noted, the
discussion further assumes that Shareholders will not be Puerto Rico resident
individuals, entities organized under the laws of Puerto Rico, persons engaged
in a trade or business in Puerto Rico or trusts resident in Puerto Rico (a
"Puerto Rico Shareholder"). PROSPECTIVE SHAREHOLDERS ARE STRONGLY URGED TO
CONSULT THEIR OWN TAX ADVISERS REGARDING THE TAX CONSEQUENCES OF THE
DISTRIBUTION, HOLDING AND DISPOSITION OF COMMON SHARES.
No rulings have been requested from the IRS with respect to the matters
discussed in this section. Counsel's opinion with respect to federal income
tax matters is contained in a letter to ACPT dated August 6, 1998 ("Counsel's
Tax Opinion") which is filed as an Exhibit to the Registration Statement of
which this Proxy Statement/Prospectus is a part. All references to Counsel's
opinion on any federal income tax matter expressed in this Proxy
Statement/Prospectus is subject to the qualifications, assumptions, and
representations set forth in Counsel's Tax Opinion, and is expressly
conditioned on the representations made by the officers of ACPT, American
Management, American Land, American Rental and IGP Group in a letter to
Counsel dated August 6, 1998 ( the "ACPT Letter") and the representations made
by the officers of IGMC, the managing general partner of IGC, in a letter to
Counsel dated August 6, 1998 (the "IGC Letter").
All computations, projections, estimates, and forecasts, including all
estimates and computations of the amount and character of income, gain, loss,
or deduction, and any underlying estimation or computation of tax basis and
value, have been furnished to Counsel by IGC. Counsel has not independently
reviewed these computations or the underlying projections, estimates, and
forecasts upon which they are based.
Counsel has assisted in the preparation of, and has reviewed, the discussion
in this "Federal Income Tax Considerations" section. Counsel is of the opinion
that the discussion in this "Federal Income Tax Considerations" section fairly
summarizes the federal income tax considerations that are likely to be
material to a Shareholder. Although the opinion of Counsel represents
Counsel's best judgement as to the matters discussed herein, it does not bind
the IRS or in any way constitute an assurance that the federal income tax
consequences described herein will be followed by the IRS. Counsel expresses
no opinion on the discussion contained in "Income Tax Considerations--Certain
State Income Tax and Puerto Rico Income Tax Considerations--Certain State Tax
Considerations" or "Income Tax Considerations--Certain State Income Tax and
Puerto Rico Income Tax Considerations--Certain Puerto Rico Income Tax
Considerations."
The summary of federal income tax consequences is based on the provisions of
the Code, the United States Department of the Treasury regulations (the
"Regulations"), published rulings of the IRS and judicial decisions as
currently in effect, all of which are subject to change and could be applied
retroactively at any time. Particularly, the Taxpayer Relief Act of 1997 (Pub.
L. 105-34) ("1997 Act") made significant changes to the Code, including
changes relating to the treatment of partnerships and REITs. It may be some
time before Regulations or other formal guidance is issued under the 1997 Act.
Such Regulations could interpret the relevant law in a manner that is contrary
to this discussion or contrary to the opinion of Counsel and such
interpretation could be applied retroactively.
All references in this "Federal Income Tax Considerations" section to Puerto
Rico law or the treatment of ACPT and IGP Group under Puerto Rico law,
including, without limitation, references to the treatment for Puerto
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Rico income tax purposes, are based on the discussion under "Income Tax
Considerations--Certain State Income Tax and Puerto Rico Income Tax
Considerations--Certain Puerto Rico Income Tax Considerations" and the opinion
of Puerto Rico Counsel described therein.
FEDERAL INCOME TAX CLASSIFICATION OF IGC.
IGC is a Delaware limited partnership. The initial public offering of IGC
Units was completed in February 1987. The basic source of criteria for
classification of an entity for federal tax purposes is Sections 301.7701-1
through 301.7701-4 of the Regulations. Under the Regulations, business
entities such as IGC that have been in existence prior to 1997 generally
retain the same classification that they claimed under the former Regulations
that were in effect prior to 1997, unless they elect otherwise. Thus, IGC will
retain its partnership status so long as it does not elect to be treated as an
association taxable as a corporation and so long as it is not a "publicly
traded partnership" that is taxed as a corporation under Code Section 7704.
Even if it satisfies the other requirements to be treated as a partnership, an
organization generally will be taxed as a corporation if it is a "publicly
traded partnership." A partnership is publicly traded if, among other things,
its interests are traded on an established securities market.
As discussed below, if the Distribution occurs at a time when IGC is treated
as a corporation for tax purposes, the Distribution will result in significant
adverse tax consequences to IGC and the Unitholders. It is possible that the
determination of whether IGC will be treated as a corporation as of January 1,
1998, will not be certain until after the Distribution and it is also possible
that the Distribution could adversely affect the determination of whether IGC
will be treated as a corporation as of January 1, 1998, because the
Distribution will remove a potential source of a significant amount of gross
income of the type that would allow IGC to qualify for an exception from the
general rule that publicly traded partnerships are taxed as corporations.
Entities such as IGC that were publicly traded partnerships on December 17,
1987 ("Existing Partnerships") were not subject to the general rules for
treatment as a corporation under Code Section 7704 until taxable years
beginning after December 31, 1997. The 1997 Act generally permitted an
Existing Partnership to make an irrevocable election ("Electing Existing
Partnership") to continue to avoid treatment as a corporation (even if it did
not qualify for the exception for partnerships with passive-type income,
described below) if the Electing Existing Partnership consented to, and paid,
a tax equal to 3.5% of its gross income for the taxable year from the active
conduct of trades or businesses of the Electing Existing Partnership. This tax
generally is treated as an income tax, but no credit is available to any
partner for federal income tax purposes. For purposes of computing the gross
income subject to this tax, the Electing Existing Partnership must include its
distributive share of the gross income of any lower-tier partnership from the
active conduct of trades of businesses of such other partnership.
The general rule that publicly traded partnerships are taxed as corporations
does not apply to a publicly traded partnership for a taxable year if at least
90% of the organization's gross income for such taxable year (and all prior
taxable years) constitutes "qualifying income." Qualifying income includes
interest, dividends, "real property rents," gain from the sale or other
disposition of real property (including property held for sale and other
property described in Code Section 1221(1)), certain income derived in
connection with certain natural resources, and gain from the sale or
disposition of a capital asset (or property described in Code Section 1231(b)
held for the production of qualifying income). Qualifying income generally
includes income that qualifies under the regulated investment company or REIT
qualification rules (see "--Federal Income Tax Classification of American
Rental--95% Gross Income Test"). However, the term "real property rents" (see
"--Federal Income Tax Classification of American Rental--75% Gross Income
Test") is expanded by removing the independent contractor requirements for
certain services provided to tenants and limiting the application of certain
constructive ownership provisions by adding a 5% ownership "floor" to certain
constructive ownership rules that generally apply to all partners and their
partnerships. Qualifying income does not include interest derived in the
conduct of a financial or insurance business or any interest that would not
constitute qualifying income for purposes of the REIT qualification rules.
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Based on unaudited results, IGC management believes that IGC meets the "90%
qualifying income" test through June 30, 1998. After the Distribution, it is
unlikely that IGC will have sufficient amounts of gross qualifying income to
have a significant effect on this computation. IGC has represented that it
will closely monitor the amount and character of IGC's gross income and will
take necessary steps, including transferring certain assets that generate non-
qualifying income to corporate entities, in order to increase the percentage
of IGC's gross income that constitutes qualifying income. In addition, the
Restructuring is contingent upon a determination that IGC will be classified
as a partnership for federal tax purposes for 1998. Such determination will be
made by legal counsel and such counsel will render an opinion as to the
partnership classification of IGC. Such opinion will be based on unaudited
income amounts and projections furnished to counsel by IGC. Such opinion will
not bind the IRS or in any way constitute an assurance that IGC will be
classified as a partnership for tax purposes for 1998. See "the Special
Meeting--Recommendation of the Board of Directors of IGC." However, there can
be no assurance that these efforts will be successful or that IGC will
generate sufficient amounts of qualifying income relative to non-qualifying
income to meet the "90% qualifying income" exemption from the general
treatment of publicly held partnerships as corporations.
Some of the steps that IGC has taken or expects to take in order to reduce
its non-qualifying gross income include: (1) IGC has transferred an interest
in IGP to IGP Group and amended the partnership agreement of IGP to specially
allocate certain non-qualifying management fee income to IGP Group and to
transfer IGC's interests in certain Puerto Rico Apartment Partnerships that
are generating non-qualifying rents from personal property to IGP Group; (2)
certain sale and leaseback arrangements have been made with respect to
personal property on behalf of certain U.S. Apartment Partnerships that IGC
expects will result in a decrease in non-qualifying rents from such personal
property that will then be subleased to tenants; and (3) taking other steps to
reduce non- qualifying income such as transferring assets that are generating
non-qualifying income, such as IGC's interest in Housing Development
Associates, S.E. ("HDA").
IGC also has taken or expects to take steps that will increase its
qualifying income, such as the liquidation of AFH into IGC. The liquidation of
AFH is expected to increase IGC's qualifying income because tax items such as
income from the sale of real property formerly held by AFH will now be
included in IGC's gross income. However, such income will likely increase
IGC's taxable income and therefore each Unitholder's distributive share of
IGC's taxable income. IGC's taxable income will also be increased as a result
of the Asset Transfers. As discussed below, IGC may not distribute sufficient
cash to allow Unitholders to satisfy their federal tax liability with respect
to the Unitholder's share of IGC's taxable income. See "--Federal Income Tax
Consequences of the Asset Transfers."
As a result of the Asset Transfers and other steps taken by IGC to maintain
its status as a partnership for federal tax purposes, it is likely that IGC
will have a lower tax basis in its assets than if the Asset Transfers and such
other steps had not been taken. This decrease in basis may be reflected in
IGC's basis in the Common Shares. This decrease may also be reflected in the
tax basis that the Shareholders take in their Common Shares because
Shareholders will take a tax basis in their Common Shares equal to the lesser
of IGC's tax basis in the Common Shares or the Shareholders' adjusted tax
basis in their IGC Units immediately before the Distribution. In addition,
there can be no assurance that the positions adopted by IGC in the Asset
Transfers and other steps taken by IGC either to reduce its non-qualifying
income or increase its qualifying income will not be successfully challenged
by the IRS.
If IGC were to fail to meet the "90% qualifying income" test for 1998, it
may be able to seek relief from the IRS whereby it would be treated as if it
met such tests for that period. Such relief would be available only if IGC
could establish to the satisfaction of the IRS that such failure was
inadvertent, if it takes timely steps so that the gross income requirements
are subsequently met, and if it agrees to make such adjustments (including
adjustments with respect to the Unitholders) or pay such amounts as may be
required by the IRS. The amounts of the adjustments or payments are intended
to represent the portion of the tax liability that would be imposed on a
partnership if it were treated as a corporation during the period of failure
to meet the "90% qualifying income" test.
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Alternatively, if IGC failed to meet the "90% qualifying income" test it
could also avoid being treated as a corporation by making the election and
paying the tax as an Electing Eligible Partnership, as described above.
If IGC failed to meet the "90% qualifying income" test for 1998 and did not
take any of the actions described above to avoid being treated as a
corporation, the following events would be deemed to occur on January 1, 1998:
(1) IGC would be deemed to transfer all of its assets (subject to its
liabilities) to a newly formed corporation in exchange for the stock of the
corporation, and (2) IGC would be deemed to distribute its stock to its
partners (including Unitholders) in liquidation of their interests in IGC.
Such deemed events generally should not give rise to gain except that (i) gain
would be recognized by IGC (and such gain would be allocated to the
Unitholders) to the extent that the aggregate amount of liabilities deemed to
be assumed by the new corporation exceed the adjusted tax basis of the assets
deemed contributed to the corporation; and (ii) gain would be recognized by a
Unitholder to the extent that cash is deemed to be distributed to the
Unitholder in excess of such Unitholder's adjusted tax basis in his or her
Units immediately before such deemed distribution.
If IGC were treated as a corporation as of January 1, 1998, then the
Distribution would be taxable to IGC to the extent that the fair market value
of the ACPT Common Shares exceed IGC's adjusted tax basis in such Common
Shares immediately before the Distribution and an amount equal to the value of
the Common Shares generally would be treated as a distribution to the
Unitholders taxable as a dividend to the extent of IGC's "earnings and
profits" (for the period that it was treated as a corporation), then a return
of capital to the extent of the Unitholder's basis in his or her Units, and
then gain from the sale or exchange of property.
The following discussion assumes that IGC will be treated as a partnership
for 1998.
FEDERAL INCOME TAX CLASSIFICATION OF ACPT.
ACPT has been organized as an entity that will be treated as a partnership
for tax purposes, in part to avoid the "double" taxation that occurs when a
corporation distributes its profits to its Shareholders and to minimize the
aggregate Puerto Rico and federal income tax imposed on the Puerto Rico source
income of IGP Group and its subsidiaries. Under current law, a partnership is
not a taxable entity and incurs no federal income tax liability. Instead, each
partner is required to take into account in computing such partner's income
tax liability such partner's allocable share of the partnership's income
whether or not the partnership makes a distribution of cash corresponding to
such income. Because American Land and American Management will be classified
as corporations for federal income tax purposes, it generally will not be
possible to avoid this "double" federal income taxation with respect to
amounts distributed by American Land or American Management to ACPT. However,
as discussed in greater detail below, so long as American Rental qualifies as
a REIT for federal income tax purposes, ACPT and its Shareholders will be able
to avoid such "double" taxation with respect to amounts distributed by
American Rental to ACPT and, so long as IGP Group will not be subject to
federal income tax and will be treated as a partnership for Puerto Rico tax
purposes, ACPT and its Shareholders effectively may be able to avoid a portion
of such "double" taxation through foreign tax credits (or deductions) with
respect to Puerto Rico taxes paid by ACPT with respect to IGP Group's Puerto
Rico source income. See "--Federal Income Taxation of American Rental," "--
Puerto Rico Income Tax Classification of IGP Group," and "--Federal Income
Taxation of ACPT and Shareholders--Foreign Tax Credit." The achievement of
these objectives, however, depends entirely upon ACPT being classified as a
partnership (rather than being classified as a "corporation" or an
"association" taxable as a corporation) for federal tax purposes, American
Rental being classified as a REIT for federal tax purposes, and IGP Group
being treated as a partnership for Puerto Rico tax purposes.
If it were determined that ACPT is taxable as a corporation or that American
Rental does not qualify as a REIT, the anticipated tax advantages to ACPT and
the Shareholders would be materially and adversely affected. If ACPT were
classified as a corporation or as an association taxable as a corporation, the
profits of ACPT would be taxed to ACPT as if it were a corporation at the
rates applicable to corporations (the current highest federal tax rate
applicable to corporations is 35%). In determining its taxable income, ACPT
would be eligible for a dividends received deduction with respect to the
dividends it receives from American Land and American
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Management (but not American Rental so long as it qualifies as a REIT).
Moreover, distributions to the Shareholders would be treated as corporate
distributions, taxable at ordinary income tax rates to the extent of earnings
and profits, or as non-taxable returns of capital or distributions taxable at
capital gains rates, depending upon the circumstances of the distribution.
If American Rental did not qualify as a REIT, the taxable income of American
Rental would be determined without regard to the deduction for distributions
applicable to REITs and such taxable income would be subject to tax at the
rates applicable to corporations. Thus, classification of ACPT as a
corporation or the failure of American Rental to qualify as a REIT for federal
income tax purposes would frustrate the objective of eliminating "double"
taxation on American Rental profits that are distributed to ACPT.
Classification of ACPT as a corporation would also preclude Shareholders
from taking into account their allocable share of any Puerto Rico income taxes
paid by ACPT for purposes of the foreign tax credit or an associated deduction
for federal tax purposes. See "--Federal Income Taxation of ACPT and
Shareholders--Foreign Tax Credit."
The basic source of criteria for classification of an entity for federal tax
purposes is Sections 301.7701-1 through 301.7701-4 of the Regulations. The
Regulations provide that for federal tax purposes, a partnership is a
"business entity" with at least two members that is not treated as a
corporation under Section 301.7701-2(b) of the Regulations. A "business
entity" is any entity recognized for federal tax purposes that is not properly
classified as a trust under Section 301.7701-4 of the Regulations or otherwise
subject to special treatment under the Code. The Regulations clarify that
although some arrangements are called trusts under local law, the term
"trusts" for federal tax purposes generally is limited to arrangements to
protect or conserve property for beneficiaries, and does not include other
arrangements, often known as business or commercial trusts, which are created
by the beneficiaries simply as a device to carry on a profit-making business
that normally would have been carried on though business organizations that
are classified as partnerships or corporations under the Code.
U.S. business entities formed pursuant to a State statute are classified as
corporations under Section 301.7701-2(b) of the Regulations if such statute
describes or refers to the entity as "incorporated" or as a "corporation,"
"body corporate," "body politic," "joint stock company," or "joint stock
association." In addition, corporations include all insurance companies,
certain entities conducting banking activities, entities wholly owned by a
State or political subdivision thereof, certain designated foreign entities,
business entities that are specifically taxable as corporations under another
provision of the Code, and certain entities that "elect" under the Regulations
to be treated as associations taxable as corporations for federal tax
purposes.
A business entity that is not classified as a corporation under Section
301.7701-2(b) generally is treated as an "eligible entity" for purposes of
electing its classification for federal tax purposes under Section 301.7701-3.
Unless it elects otherwise, a domestic eligible entity formed after January 1,
1997, is classified as a partnership if it has two or more members or is
disregarded as an entity separate from its owner if it has a single owner.
Even if it satisfies the other requirements to be treated as a partnership,
an organization generally will be taxed as a corporation if it is a "publicly
traded partnership." A partnership is publicly traded if, among other things,
its interests are traded on an established securities market. The general rule
that publicly traded partnerships are taxed as corporations does not apply to
a publicly traded partnership for a taxable year if at least 90% of the
organization's gross income for such taxable year (and all prior taxable
years) constitutes "qualifying income." Qualifying income includes interest,
dividends and "real property rents."
ACPT is a Maryland investment trust which has been organized to carry on a
profit-making business. Therefore, ACPT will qualify as a "business entity"
for purposes of the Regulations. Further, ACPT does not come within those
entities classified as corporations under Section 301.7701-2(b) of the
Regulations, and, subject to the discussion below, is not treated as a
corporation under any provision of the Code other than Code Section 7701.
Thus, as a domestic eligible entity with more than one member, it will be
classified as a partnership absent an affirmative election to be treated as a
corporation for tax purposes.
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If the Common Shares are traded on AMEX and/or the PSE, ACPT will be
regarded as a publicly traded partnership. Therefore, for ACPT to qualify as a
partnership for federal income tax purposes, at least 90% of ACPT's gross
income must be "qualifying income," which includes dividends, interest, real
property rents and gain from the sale or other disposition of real property.
Because ACPT initially will hold only interests in American Rental, American
Land, American Management and IGP Group, it is anticipated that virtually all
of ACPT's income will be in the form of dividends, including REIT dividends.
The officers of ACPT have represented that at least 90% of ACPT's income will
consist of "real property rents," interest and dividends.
Certain amounts will be transferred by IGC to American Housing on behalf of
ACPT pursuant to IGC's contractual obligation to transfer distributions
received from certain partnerships pending receipt of consent to transfer
IGC's interest in such partnerships. See "Transactions with Related Parties--
Staggered Transfer of Partnership Interests to American Housing." Because ACPT
and American Housing will treat amounts received pursuant to such transfers as
made in connection with, or as, contributions to capital, ACPT will not
include such amounts in gross income. However, there can be no assurance that
such treatment will not be successfully challenged. If such amounts were
recharacterized as taxable income to ACPT, such income may not be treated as
qualifying income for purposes of the 90% of income test, and, depending on
the amount and character of ACPT's gross income from this and other sources,
could cause ACPT to fail the 90% income test and thereby fail to qualify as a
partnership for federal tax purposes.
Counsel's Opinion of Federal Income Tax Classification of ACPT.
Covington & Burling is of the opinion, subject to the following assumptions
and representations, that under the Code, the Regulations, published rulings
of the IRS, and judicial decisions, ACPT will be treated as a "partnership"
for federal income tax purposes. In rendering this opinion, Counsel has
reviewed ACPT's Declaration of Trust, Bylaws, and such other documents as
Counsel has considered necessary for purposes of this opinion.
This opinion is based on the assumption that 90% or more of ACPT's income
will be "qualifying income" within the meaning of Section 7704 of the Code.
Under the current organizational structure, virtually all of ACPT's income
will consist of "qualifying income" in the form of dividends. However, Counsel
has relied on the representations in the ACPT Letter that at least 90% of
ACPT's income will continue to consist of dividends and other "qualifying
income." There can be no assurance that this representation accurately
predicts the sources of ACPT's income and that at least 90% of ACPT's income
will be qualifying income for any taxable year.
Counsel's opinion relies upon the representations made by the officers of
ACPT, American Management, American Land, American Rental and IGP Group in the
ACPT Letter. Counsel's opinion is based on the assumption that any successor
officers of such entities will make and satisfy these representations. These
representations include, but are not limited to, the following
representations:
(i) ACPT will be operated in accordance with applicable provisions of the
Act, the Declaration of Trust, and this Proxy Statement/Prospectus,
including, without limitation, compliance with the representations of ACPT
herein.
(ii) ACPT shall not make an election to be classified as an association
taxable as a corporation for federal tax purposes.
(iii) ACPT shall take no action that would cause it to be treated other
than as a partnership for federal tax purposes under Treasury Regulations
Sections 301.7701-1 through 301.7701-4.
(iv) At least 90% of ACPT's gross income will constitute "qualifying
income," as that term is defined in Code Section 7704(d).
Counsel's opinion further relies upon the following representations made
with respect to IGP Group:
(i) IGP Group will be operated in accordance with applicable provisions
of its Articles of Incorporation, Bylaws, and this Proxy
Statement/Prospectus, including, without limitation, compliance with the
representations of IGP Group herein.
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(ii) IGP Group shall take such actions as may be necessary to obtain and
preserve its status as a special partnership under applicable Puerto Rico
law.
(iii) IGP Group shall take such action as may be necessary to obtain and
preserve its classification as a corporation (or an association taxed as a
corporation) for federal tax purposes (including, if necessary, an election
on IRS Form 8832).
Counsel's opinion further relies upon the following representations made
with respect to American Land:
(i) American Land will be operated in accordance with applicable
provisions of its Articles of Incorporation, Bylaws, and as described in
this Proxy Statement/Prospectus, including, without limitation, compliance
with the representations of American Land herein.
(ii) American Land shall take such action as may be necessary to obtain
and preserve its classification as a corporation (or an association taxable
as a corporation) for federal tax purposes.
Counsel's opinion further relies upon the following representations made
with respect to American Rental:
(i) American Rental will be operated in accordance with applicable
provisions of its Articles of Incorporation, Bylaws, and as described in
this Proxy Statement/Prospectus, including, without limitation, compliance
with the representations of American Rental under "Federal Income Tax
Classification of American Rental--Counsel's Opinion Relating to
Qualification of American Rental as a REIT."
FEDERAL INCOME TAX CLASSIFICATION OF AMERICAN RENTAL.
American Rental will be formed as a Maryland real estate investment trust
and will elect to be treated as a REIT for federal tax purposes for its
taxable year ending December 31, 1998, and for each subsequent taxable year.
An eligible entity that files an election under Code Section 856(c)(1) to be
treated as a REIT is treated as having made an election under the Regulations
to be classified as an association taxable as a corporation, effective as of
the first day the entity is treated as a REIT. The following is a summary of
the material federal income tax considerations affecting ACPT and its
Shareholders relating to American Rental's treatment as a REIT for federal tax
purposes. See also "--Federal Income Taxation of ACPT and Shareholders."
REIT Qualification.
American Rental may elect to be treated as a REIT if it satisfies certain
detailed requirements imposed by the Code. If American Rental qualifies for
taxation as a REIT, it generally will not be subject to corporate income tax
to the extent American Rental currently distributes its REIT taxable income to
its shareholders. This treatment effectively eliminates the "double" taxation
(i.e., taxation at both the corporate and shareholder levels) imposed on
investments in most regular corporations. A qualifying REIT, however, may be
subject to certain excise and other taxes, as well as to normal corporate tax
on taxable income that is not currently distributed to its shareholders. See
"--Taxation of American Rental as a REIT." In addition, if American Rental
fails to qualify as a REIT in any taxable year, it will be subject to federal
income tax at regular corporate rates on all of its taxable income. The
current maximum federal tax rate for corporations is 35%.
General REIT Qualification Requirements, Ownership Structure, and Stapled
Stock Rules.
American Rental must be organized as an entity that would, if it does not
maintain its REIT status, be taxable as a domestic corporation. It cannot be a
financial institution or an insurance company, and it must be managed by one
or more trustees or directors. American Rental expects to meet each of these
requirements. Subject to the following discussion, American Rental also
expects to satisfy the requirements that are described below concerning share
ownership and reporting, the nature and amounts of American Rental's gross
income and assets, and the levels of required annual distributions. However,
the ability of American Rental to satisfy these requirements will not always
be within the control of ACPT or American Rental.
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Unlike most other REITs in which the public owns direct interests in the
REIT entity, the Shareholders will own Common Shares in ACPT, a Maryland real
estate investment trust that is expected to be treated as a partnership for
federal tax purposes and as a corporation for Puerto Rico tax purposes, which
in turn owns all of the common stock of American Rental (a Maryland real
estate investment trust which will elect to be taxed as a REIT), IGP Group (a
Puerto Rico "hybrid" entity that is expected to be treated as a corporation
for federal tax purposes and a special partnership for Puerto Rico tax
purposes), American Land and American Management (both are domestic
corporations). This complex structure raises a greater number of
interpretative issues, including those under the REIT qualification rules, and
more such issues which lack clear guidance, than generally would be
encountered in most other direct investments in REITs, domestic corporations,
or foreign corporations.
Under the "stapled stock" rules, if a domestic corporation and a foreign
corporation are "stapled entities," the foreign corporation is treated as a
domestic corporation and, for purposes of applying the REIT qualification
rules, all "stapled entities" are treated as a single entity. The term
"stapled entities" means any group of two or more entities if more than 50
percent of the value of the beneficial interest of such entities consists of
"stapled interests." Two or more interests are "stapled interests" if "by
reason of form of ownership, restrictions on transfer, or other terms or
conditions, in connection with the transfer of one of such interests, the
other such interests are also transferred or required to be transferred." If
American Rental and any other corporations were found to be "stapled
entities," it is unlikely that American Rental would qualify as a REIT because
the REIT qualifications rules (including those relating to sources of gross
income, types of assets, and annual distribution requirements) would be
applied as if all such "stapled entities" were a single entity. If IGP Group
and any domestic corporation were found to be "stapled entities," IGP Group
would be treated as a domestic corporation and would be subject to federal
income tax on its world-wide taxable income at rates applicable to U.S.
corporations (the current highest rate is 35%) and distributions to ACPT would
be taxable as dividends to the extent of earnings and profits, nontaxable
dividends to the extent of basis, and then as capital gain.
There are no restrictions, terms, or conditions on the stock (or other
beneficial ownership interests) of American Rental, American Land, American
Management or IGP Group that would require the transfer of any one in
connection with the transfer of any other. Thus, ACPT is free to transfer all
or any portion of the stock of each of American Rental, American Land,
American Management, or IGP Group without regard to the transfer of all or any
portion of the stock of any other of such entities. However, it is possible
that the IRS could argue that such stock comes within the stapled stock rules
due to the common ownership of such stock by ACPT, whereby a transfer of a
Common Share results in the indirect transfer of the beneficial ownership of a
portion of the stock owned by ACPT. It does not appear that Congress intended
to apply the "stapled stock" rules merely because an upper-tier entity owns
stock in several lower-tier entities that are not subject to transfer
restrictions. For example, the legislative history to the enactment of the
"stapled stock" rules in 1984 indicates that Congress did not intend to treat
stock of a parent corporation as stapled to the stock of a subsidiary
corporation. Although ACPT is expected to be treated as a partnership and not
a corporation, there is no indication that Congress intended to apply
different rules merely because the "parent" is a publicly traded partnership.
It appears that in enacting the "stapled stock rules" with respect to REIT
stock, Congress was primarily concerned that the pairing of the stock of an
active business with that of a REIT would result in the avoidance of corporate
level tax with respect to the real property used in the active business,
particularly when such real property is leased by the REIT to the active
business. The constructive ownership rules which generally prevent rents from
related parties from qualifying as "rents from real property" for REIT
qualification purposes generally do not apply to two corporations whose stock
are merely required to be traded together. See "--75% Gross Income Test." In
the case of ACPT, American Rental has represented that it (and its
subsidiaries) will not lease any property to American Land, American
Management, IGP Group, or any entity related thereto. More importantly, any
rental income received directly or indirectly by American Rental from such
entities would not qualify as "rents from real property" such term does not
include rents received from an entity in which American Rental or ACPT
directly or indirectly through the constructive ownership rules owns a 10% or
greater interest.
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However, the legislative history also suggests that Congress may have
intended to apply the "stapled stock" rules in a broader context, even if
there is no potential for avoidance of corporate-level taxes by the active
business. For example, the legislative history provides that in enacting the
REIT provisions Congress did not intend the "dilution" in the investment of
qualified real estate activities that occurs when small investors buy shares
in another corporation stapled to REIT shares. There is little guidance
available on the intended scope of the stapled stock rules with respect to the
potential dilution of investment in qualified real estate activities.
Although there is little guidance on the application of the stapled stock
rules to REITs there is legislative activity in this area. President Clinton
has made several legislative proposals relating to REITs as part of the
revenue provisions contained in the President's Fiscal Year 1999 Budget
Proposal. One legislative proposal which has been enacted limits the
protection currently provided to certain REITs that were excepted from the
general application of the stapled stock rules under the Tax Reform Act of
1984 to certain property acquired on or before March 26, 1998. Internal
Revenue Service Restructuring and Reform Act of 1998, Pub. L. No. 105-206,
(subsection) 7002 (1998); 144 Cong. Rec. E488-89 (daily ed. March 26, 1998)
(Statement of Rep. Archer); "General Explanation of the Administration's
Revenue Proposals" (February 1998). Although the current legislative proposals
do not directly address the ACPT structure, these proposals may result in
increased legislative or administrative scrutiny in this area, and could lead
to new provisions, or new guidance on existing provisions, that could result
in the application of the stapled stock rules to American Rental and the other
corporations owned by ACPT. The current statutory provisions grant the
Treasury Department broad authority to prescribe "such regulations as may be
necessary to prevent avoidance or evasion of Federal income tax through the
use of stapled entities."
In light of the lack of existing guidance in this area and the possibility
of legislative and/or administrative activity in this area, there can be no
assurance that the IRS would not seek to apply the "stapled stock" rules to
the entities owned by ACPT under current law or under future legislative
proposals, and if so, that such application by the IRS would not be upheld by
a court of competent jurisdiction.
As discussed below under "--Share Ownership, Reporting" another legislative
proposal included in the "General Explanation of the Administration's Revenue
Proposals" (February 1998) would add an additional requirement for REIT
qualification. It appears that American Rental would not qualify as a REIT if
it were subject to this requirement as proposed, because under the current
ownership structure, ACPT would own more than 50% of the value and voting
rights with respect to American Rental's stock.
Share Ownership, Reporting.
Beneficial ownership of a REIT must be evidenced by transferable shares or
transferable certificates of beneficial interest, which must be held by 100 or
more persons, determined without reference to any rules of attribution. The
"100 person" test must be met for approximately 92% of the days in each
taxable year. All of the voting common stock of American Rental will be held
by ACPT, and voting preferred stock will be issued to 320 employees of
American Management and IGP. The preferred stock will represent a liquidation
value of $192,000 ($600 per share) and will have a 9% cumulative preferred
dividend. Thus, at the time of the Distribution, the stock of American Rental
will be held by more than 100 persons. The preferred stock cannot be
transferred to any person who already owns ACPT preferred shares and is
subject to other restrictions on transfer.
In addition, not more than 50% of the value of the American Rental stock may
be held, directly or indirectly, applying certain constructive ownership
rules, by five or fewer individuals at any time during the last half of each
of American Rental's taxable years (the "closely held" test). At the time of
the Distribution, American Rental would not meet the "closely held" test
because of the percentage ownership of the Wilson Family. American Rental is
not required to satisfy the "100 person" and "closely held" tests until its
second taxable year for which an election is made to be taxed as a REIT. It is
not anticipated that American Rental will meet the "closely held" test for its
taxable year ending December 31, 1998 (the first taxable year for which it
will elect to be a REIT) due to the percentage ownership of the Wilson Family.
The Private Offering, if completed, would result in dilution of the percentage
interest of all ACPT shareholders including the Wilson Family, whose
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percentage ownership would likely be reduced below 40%. James J. Wilson and J.
Michael Wilson have advised ACPT that the Wilson Family will take such actions
as may be necessary to reduce its percentage ownership to below 40% before or
during the first half of American Rental's second taxable year in order to
permit American Rental to qualify as a REIT. However, no member of the Wilson
Family is under an obligation to do so. Thus, no assurance can be given that
American Rental will qualify as a REIT. Sales of a significant number of
Common Shares by the Wilson Family or others could affect the market price of
Common Shares. See "--Federal Income Taxation of ACPT and Shareholders--
Section 754 Election."
ACPT's Declaration of Trust, subject to certain exceptions, authorizes the
trustees to take such actions as are necessary and desirable to preserve
American Rental's qualification as a REIT and to limit any person (other than
certain current IGC Unitholders) to direct or indirect ownership of no more
than 2% of the outstanding Common Shares (the "Ownership Limit"). No transfer
of Common Shares will be permitted to the extent that such transfer will cause
the Trust to cease to qualify as a partnership for federal tax purposes or
cause American Rental to cease to qualify as a REIT. The foregoing
restrictions on transferability and ownership will continue to apply until (i)
the Board of Trustees determines that it is no longer in the best interests of
ACPT for American Rental to attempt to qualify, or to continue to qualify, as
a REIT and (ii) there is an affirmative vote of two-thirds of the votes
entitled to be cast on such matter at a regular or special meeting of the
Shareholders.
Any transfer of Shares in violation of the transfer restrictions shall be
null and void, and the intended transferee will acquire no rights to the
Common Shares (Common Shares the transfer of which would be null and void
under these restrictions are hereinafter referred to as "Excess Shares"). Any
Excess Shares not otherwise exempted will be treated as transferred to one or
more organizations selected by the Board of Trustees ("Charitable
Beneficiary"). Any dividends payable with respect to the Excess Shares will be
held in trust for the Charitable Beneficiary. The Excess Shares may be
retransferred by the Charitable Beneficiary to any person. Any economic
benefits accruing from a transfer of such Excess Shares will be borne by the
Charitable Beneficiary, and the intended transferee will generally receive
upon such retransfer the lesser of the value of the Excess Shares at the time
of the purported transfer and the value of the Excess Shares at the time of
the subsequent retransfer.
To monitor American Rental's compliance with the share ownership
requirements discussed above, American Rental is required to maintain records
disclosing the actual ownership of its stock. To do so, American Rental must
demand written statements each year from the record holders of certain
percentages of its stock in which the record holders are to disclose the
actual owners of the shares (i.e., the persons required to include in gross
income the REIT dividends). ACPT and American Rental will treat Common Shares
as if they were direct stock in American Rental for purposes of these
requirements and therefore will demand such statements from Shareholders as
well as from ACPT and the persons holding the preferred stock in American
Rental. A list of those persons failing or refusing to comply with this demand
must be maintained as part of American Rental's records. Shareholders who fail
or refuse to comply with the demand must submit a statement with their tax
returns disclosing the actual ownership of the shares and certain other
information.
The 1997 Act replaced the rule that disqualified a REIT for any year in
which the REIT failed to comply with the above-described Regulations relating
to ascertaining ownership, with a penalty for such failure ($25,000, or
$50,000 for intentional violations). Further, the 1997 Act provides that a
REIT that complies with such Regulations to ascertain ownership and which did
not know, or have reason to know, that it failed the "closely held" test will
be treated as having met the "closely held" test.
One of the legislative proposals contained in the "General Explanations of
the Administration's Revenue Proposals" issued by the Department of the
Treasury in February 1998, in connection with President Clinton's 1999 Budget
Proposals, would add an additional requirement for REIT qualification that no
person can own stock of a REIT possessing more than 50% of the total combined
voting power of all classes of voting stock or more than 50% of the total
value of shares of all classes of stock. Constructive ownership rules would
apply for purposes of determining a person's stock ownership. It appears that
American Rental would not qualify as a
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REIT if it were subject to this requirement, as proposed, because ACPT owns
more than 50% of the voting power and total value of American Rental's stock.
This new requirement is proposed to apply to entities electing REIT status for
taxable years beginning on or after the date of first committee action. If
legislation based on this proposal is enacted, the determination of whether
American Rental will qualify as a REIT may depend on whether American Rental
is subject to such legislation based on the effective date of such legislation
as enacted.
A second legislative proposal contained in the Administration's Revenue
Proposals would limit the current exceptions from the "stapled stock" rules
for certain REITs that were in existence prior to the 1984 enactment of those
rules. Bills containing a version of this proposal have been introduced in
both the House of Representatives and the Senate. See "--General REIT
Qualification Requirements, Ownership Structure, and the Stapled Stock Rules."
A third legislative proposal contained in the Administration's Revenue
Proposals would expand the current prohibition that REITs cannot own more than
10% of the voting interests of a corporation to also exclude ownership of more
than 10% of the value of all classes of stock of a corporation. Although these
proposals may not directly affect ACPT or American Rental in their current
form, they indicate the possibility that there may be significant legislative
and administrative activity relating to the qualification of an entity as a
REIT in the near future.
Sources of Gross Income.
In order to qualify as a REIT for a particular year, American Rental also
must meet three tests governing the sources of its income. These tests are
designed to ensure that a REIT derives its income principally from passive
real estate investments. In evaluating a REIT's income, the REIT will be
treated as receiving its proportionate share of the income produced by any
partnership in which the REIT invests, and any such income will retain the
character that it has in the hands of the partnership. American Rental will
hold virtually all of its real property indirectly through American Housing
and the U.S. Apartment Partnerships in which American Housing holds an
interest. American Rental owns a 99% limited partner interest in American
Housing. American Housing Management Company, a Delaware corporation that is
wholly owned by American Rental, will have a 1% general partner interest in
American Housing. As a wholly-owned subsidiary of American Rental, American
Housing Management Company will be a "qualified REIT subsidiary." A qualified
REIT subsidiary is not treated as a separate corporation for federal tax
purposes, and all of American Housing Management Company's assets (including
its 1% general partner interest in American Housing), liabilities and items of
income, deduction and credit are treated as assets, liabilities and such items
of American Rental. Because American Housing will have a single owner, it will
be disregarded as a separate entity for tax purposes. For federal income tax
purposes, all of the properties held by American Housing (including its
interests in the U.S. Apartment Partnerships) will be treated as if they were
held directly by American Rental because both American Housing Management
Company and American Housing are single owner entities that are disregarded
for tax purposes as entities separate from their owners.
75% Gross Income Test.
At least 75% of a REIT's gross income for each taxable year must be derived
from specified classes of income that principally are real estate related. The
permitted categories of principal importance to American Rental are: (i) rents
from real property, (ii) interest on loans secured by real property, (iii)
gain from the sale of real property or loans secured by real property
(excluding gain from the sale of property held primarily for sale to customers
in the ordinary course of American Rental's trade or business, referred to
below as "dealer property"), (iv) income from the operation and gain from the
sale of certain property acquired in connection with the foreclosure of a
mortgage securing that property ("foreclosure property"), (v) distributions
on, or gain from the sale of, shares of other qualifying REITs, (vi)
abatements and refunds of real property taxes, and (vii) "qualified temporary
investment income" (described below). In evaluating American Rental's
compliance with the 75% income test (as well as the 95% income test described
below), gross income does not include gross income from "prohibited
transactions." A prohibited transaction is one involving a sale of dealer
property, not including foreclosure property and certain dealer property held
by the REIT for at least four years.
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American Rental expects that substantially all of its share of the operating
gross income of American Housing will be considered rent from real property.
Rent from real property is qualifying income for purposes of the 75% income
test only if certain conditions are satisfied. Rent from real property
includes charges for services customarily rendered to tenants and rent
attributable to personal property leased together with the real property as
long as the personal property rent is less than 15% of the total rent. Rent
from real property generally does not include rent based on the income or
profits derived from the property. American Rental and American Housing do not
intend to lease property and receive rentals based on the tenants' net income
or profit. However, rent based on a percentage of gross income is permitted as
rent from real property, and American Rental and American Housing may have
leases where rent is based on a percentage of gross income. Also excluded is
rent received from a person or corporation in which American Rental (or
American Housing or ACPT or any of either entity's 10% or greater owners)
directly or indirectly through the constructive ownership rules contained in
Section 318 of the Code owns a 10% or greater interest.
Also excluded from rent from real property is "impermissible tenant services
income" in excess of a one percent de minimis rule discussed below, which is
not treated as allowable rent from real property for purposes of the 75%
income test (as well as the 95% income test described below). Generally,
impermissible tenant service income includes any amounts received directly or
indirectly by a REIT for services furnished or rendered by the REIT to its
tenants or for managing or operating the rental property. However,
impermissible tenant service income does not include amounts received by the
REIT for services performed by an "independent contractor" from whom the REIT
does not derive any income or any amounts received by the REIT for any
services provided by the REIT that are "usually or customarily rendered" in
connection with the rental of space for occupancy only and are not considered
rendered primarily for the convenience of the tenant (applying standards that
govern in evaluating whether rent from real property would be unrelated
business taxable income when received by a tax-exempt owner of the property).
If the REIT's impermissible tenant services income from a property exceeds one
percent of all amounts received or accrued from such property, all the amounts
received by the REIT from that property fail to qualify as rent from real
property for purposes of the 75% and 95% income tests.
As discussed above, American Rental will hold its interests in the U.S.
Apartment Partnerships indirectly through American Housing and American
Housing Management Company, but will be treated as if it owned such interests
directly for federal tax purposes. Property management services for the U.S.
Apartment Partnerships and for other rental apartments not owned by IGC or
ACPT will be provided by American Management, a Delaware corporation in which
ACPT owns all of the stock. American Rental, American Housing, American
Housing Management, and American Management have represented that the only
material services to be provided by them to tenants will be those services
usually or customarily rendered in connection with the rental of space for
occupancy only and that they will not provide services that might be
considered rendered primarily for the convenience of tenants, such as hotel,
health care or extensive recreational or social services. Counsel has relied
upon these representations (along with other representations) in issuing its
opinion on the qualification of American Rental as a REIT. American Rental
believes that substantially all of its proportionate share of American
Housing's rental income will be qualifying income under the 75% income test,
and that the provision of services by American Rental, American Housing,
American Housing Management Company, or American Management will not cause
such rental income to fail to be included under that test.
Upon American Rental's ultimate sale of properties, any gains realized also
are expected to constitute qualifying income, in the form of gain from the
sale of real property (not involving a prohibited transaction).
American Housing will receive certain amounts pursuant to IGC's contractual
obligation to transfer distributions received from certain partnerships
pending receipt of consent to transfer IGC's interest in such partnerships.
See "Transactions with Related Parties--Staggered Transfer of Partnership
Interests to American Housing." Because American Housing will treat amounts
received pursuant to such transfers as made in connection with, or as,
contributions to capital, American Rental will not include such amounts in
gross income. However, there can be no assurance that such treatment will not
be successfully challenged. If such amounts were recharacterized as taxable
income to American Housing, such income may not be treated as qualifying
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income for purposes of the 75% income test, and, depending on the amount and
character of American Rental's gross income from this and other sources, could
cause American Rental to fail the 75% income test. See "--Failing the 75% or
95% Tests; Reasonable Cause."
95% Gross Income Test.
In addition to earning 75% of its gross income from the sources listed
above, at least an additional 20% of American Rental's gross income for each
taxable year must come either from those sources, or from dividends, interest
or gains from the sale or other disposition of stock or other securities that
do not constitute dealer property. The 1997 Act expanded the types of income
qualifying for the 95% test (but not the 75% test) to include income from
certain hedging instruments and gain on the disposition of such instruments.
The 95% test permits a REIT to earn a significant portion of its income from
traditional "passive" investment sources that are not necessarily real estate
related. The term "interest" (under both the 75% and 95% tests) does not
include amounts that are based on the income or profits of any person.
American Rental believes it will meet the 95% Gross Income Test on an annual
basis.
Failing the 75% or 95% Tests; Reasonable Cause.
As a result of the 75% and 95% tests, REITs generally are not permitted to
earn more than 5% of their gross income from active sources (such as brokerage
commissions or other fees for services rendered). This type of income will not
qualify for the 75% test or 95% test but it is not expected that American
Rental would have a significant amount of such income and other nonqualifying
income is expected to be at all times less than 5% of American Rental's annual
gross income. While American Rental does not anticipate that it will earn
substantial amounts of nonqualifying income, if nonqualifying income exceeds
5% of American Rental's gross income, American Rental could lose its status as
a REIT.
If American Rental fails to meet either the 75% or 95% income tests during a
taxable year, it may still qualify as a REIT for that year if (i) it reports
the source and nature of each item of its gross income in its federal income
tax return for that year; (ii) the inclusion of any incorrect information in
its return is not due to fraud with intent to evade tax; and (iii) the failure
to meet the tests is due to reasonable cause and not to willful neglect.
However, in that case, American Rental would be subject to a 100% tax based on
the greater of the amount by which it fails either the 75% or 95% income tests
for such year. See "--Taxation of American Rental as a REIT."
Character of Assets Owned.
On the last day of each calendar quarter, American Rental must meet two
tests concerning the nature of its investments. For these purposes, American
Rental will be deemed to own all of American Housing's assets (including
American Housing's proportionate share of the U.S. Apartment Partnerships).
First, at least 75% of the value of the total assets of American Rental
generally must consist of real estate assets, cash, cash items (including
receivables) and government securities. For this purpose, "real estate assets"
include interests in real property, interests in loans secured by mortgages on
real property or by certain interests in real property, shares in other REITs
and certain options, but exclude mineral, oil or gas royalty interests. The
temporary investment of new capital in debt instruments also qualifies under
this 75% asset test, but only for the one-year period beginning on the date
American Rental receives the new capital. Second, although the balance of
American Rental's assets generally may be invested without restriction,
American Rental will not be permitted to own (i) securities of any one non-
governmental issuer that represent more than 5% of the value of American
Rental's total assets or (ii) more than 10% of the outstanding voting
securities of any single issuer. A REIT, however, may own 100% of the stock of
a qualified REIT subsidiary, in which case the assets, liabilities and items
of income, deduction and credit of the subsidiary are treated as those of the
REIT. American Housing Management Company expects to be a qualified REIT
subsidiary because American Rental will own all of its stock. Thus, all of
American Housing Management Company's assets, including its 1% interest in
American Housing, will be treated as being owned by American Rental.
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Generally, a REIT's "total assets" means the gross assets of the REIT
determined in accordance with generally accepted accounting principles. A REIT
generally is required to revalue its assets at the end of a quarter in which
it acquires any security or property other than cash and similar items.
However, a revaluation of assets generally is not required at the end of any
quarter during which there has been no such acquisition. A REIT is required to
keep sufficient records of its investments so as to be able to show that it
has complied with these requirements during the taxable year.
American Rental expects that it will comply with these asset tests.
Annual Distributions to Shareholders.
To maintain REIT status, American Rental generally must distribute to its
shareholders in each taxable year at least 95% of its net ordinary income
(capital gain is not required to be distributed). More precisely, American
Rental must distribute at least an amount equal to (i) 95% of the sum of (a)
its "REIT Taxable Income" before deduction of dividends paid and excluding any
net capital gain and (b) any net income from foreclosure property less the tax
on such income, minus (ii) certain limited categories of "excess noncash
income." REIT Taxable Income is defined to be the taxable income of the REIT,
computed as if it were an ordinary corporation with certain modifications. For
example, the deduction for dividends paid is allowed, but neither net income
from foreclosure property, nor net income from prohibited transactions, is
included. In addition, the REIT may carry over, but not carry back, a net
operating loss for 20 years following the year in which it was incurred.
The 1997 Act permits a REIT to elect to retain and pay income tax on net
long-term capital gains it receives during the tax year. If American Rental
were to make such an election, ACPT and the Shareholders would include in
their income as long-term capital gains their proportionate share of the
undistributed long-term capital gains as designated by American Rental.
Generally, the shareholders of an electing REIT are deemed to have paid their
share of the tax paid by the REIT with respect to the undistributed capital
gains. Also, the basis of the shareholders' shares in the REIT are increased
by the amount of the undistributed capital gains (less the amount of capital
gains tax paid by the REIT) included in the shareholders' long-term capital
gains. These new provisions (in particular, the shareholder credit for taxes
paid and the resulting shareholder basis adjustment) should apply to the
Shareholders if American Rental were to make such an election even though the
Shareholders hold their interests in the REIT indirectly through ACPT.
However, formal guidance on this issue has not yet been provided.
A REIT may satisfy the 95% distribution test with dividends paid during the
taxable year and with certain dividends paid after the end of the taxable
year. Dividends paid by American Rental in January that were declared during
the last calendar quarter of the prior year and were payable to shareholders
(including ACPT) on a date during the last calendar quarter of that prior year
are treated as paid on December 31 of the prior year. Other dividends declared
before the due date of American Rental's tax return for the taxable year
(including extensions) also will be treated as paid in the prior year for
American Rental, if they are paid (i) within 12 months of the end of such
taxable year and (ii) no later than American Rental's next regular
distribution payment. Dividends that are paid after the close of a taxable
year and do not qualify under the above-mentioned rule governing payments made
in January will be taxable to ACPT and the Shareholders in the year paid, even
though they may be taken into account by American Rental for a prior year. A
nondeductible excise tax equal to 4% will be imposed on American Rental for
each calendar year to the extent that dividends declared and distributed or
deemed distributed before December 31 are less than the sum of (a) 85% of
American Rental's "ordinary income" for such year, plus (b) 95% of American
Rental's capital gain net income for such year, plus (c) income not
distributed in earlier years minus (d) distributions in excess of income in
earlier years.
American Rental will be taxed at regular corporate rates to the extent that
it retains any portion of its taxable income (e.g., if American Rental
distributes only the required 95% of its taxable income, it would be taxed on
the retained 5%). Under certain circumstances, American Rental may not have
sufficient cash or other liquid assets to meet the distribution requirement.
This could arise because of competing demands for American Rental's funds, or
because of timing differences between tax reporting and cash receipts and
disbursements (i.e.,
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income may have to be reported before cash is received, or expenses may have
to be paid before a deduction is allowed). In addition, cash associated with
taxable income may be used to make non-deductible payments of principal on
liabilities, resulting in taxable income without associated funds to make a
distribution. Although this may be alleviated to some extent by depreciation
deductions, such deductions will not be available after property is fully
depreciated for tax purposes (that is, after the applicable cost recovery
period). Although American Rental has represented that it will meet the 95%
distribution requirement, no assurance can be given that necessary funds will
be available.
If American Rental fails to meet the 95% distribution requirement because of
an adjustment to American Rental's taxable income by the IRS, American Rental
may be able to cure the failure retroactively by paying a "deficiency
dividend" (as well as applicable interest and penalties) within a specified
period.
American Rental is required to make the distributions described above to its
shareholders, including ACPT, in order to retain its status as a REIT.
Although ACPT is required under the terms of ACPT's Declaration of Trust to
distribute annually to Shareholders, in cash and/or property, an amount equal
to 45% of the net taxable income of ACPT allocated to Shareholders less the
amount of taxes paid by ACPT in Puerto Rico and other foreign countries and
certain taxes paid by American Rental with respect to undistributed capital
gains, there can be no assurance that each Shareholder will receive sufficient
cash distributions to satisfy such Shareholder's tax liability arising from
the ownership of Common Shares. See "Distribution Policy."
Taxation of American Rental as a REIT.
American Rental will adopt the calendar year for federal income tax purposes
and will use the accrual method of accounting. For each taxable year in which
American Rental qualifies as a REIT, it generally will be taxed only on the
portion of its taxable income that it retains (which will include
undistributed net capital gain), because American Rental will be entitled to a
deduction for its dividends paid to shareholders during the taxable year. A
dividend-paid deduction is not available for dividends that are considered
"preferential" within any given class of shares or as between classes.
Although American Rental's preferred and common shares are subject to
different distribution rights for each class of stock, dividends paid by
American Rental will not be disqualified as "preferential" so long as every
shareholder is treated the same as all other shareholders in the same class
(common or preferred) and all distributions are made in accordance with the
dividend rights of each class of stock. Thus, American Rental does not
anticipate that it will pay any such "preferential" dividends.
American Rental would be subject to tax on any income or gain from
foreclosure property at the highest corporate rate (currently 35%). A
confiscatory tax of 100% applies to any net income from prohibited
transactions. In addition, if American Rental fails to meet either the 75% or
95% source of income tests described above but still qualifies for REIT status
under the reasonable cause exception to those tests, a 100% tax would be
imposed equal to the amount obtained by multiplying (i) the greater of the
amount, if any, by which it failed either the 75% income test or the 95%
income test, by (ii) the ratio of American Rental's REIT Taxable Income to
American Rental's gross income (excluding capital gain and certain other
items). American Rental also will be subject to the minimum tax on items of
tax preference (excluding items specifically allocable to ACPT Shareholders).
Finally, under regulations that are to be promulgated, American Rental also
may be taxed at the highest regular corporate tax rate on any built-in gain
(i.e., the excess of value over adjusted tax basis) attributable to assets
that American Rental acquires in certain tax-free corporate transactions, to
the extent the gain is recognized during the first ten years after American
Rental acquires such assets.
Failure to Qualify as a REIT.
For any taxable year in which American Rental fails to qualify as a REIT, it
would be taxed at the usual corporate rates on all of its taxable income.
Distributions to its shareholders would not be deductible in computing that
taxable income, and distributions would no longer be required. Any corporate
level taxes generally would reduce the amount of cash available to American
Rental for distribution to ACPT and the Shareholders and, because the
shareholders would continue to be taxed on their proportionate share of the
taxable
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dividends received by ACPT, the net after tax yield to the Shareholders from
their investment in ACPT likely would be reduced substantially. As a result,
American Rental's failure to qualify as a REIT during any taxable year could
have a material adverse effect upon ACPT and its Shareholders. If American
Rental loses its REIT status, unless certain relief provisions apply, American
Rental will not be eligible to elect REIT status again until the fifth taxable
year which begins after the first year for which American Rental's election
was terminated.
If, after forfeiting its REIT status, American Rental later qualifies and
elects to be taxed as a REIT again, American Rental may face significant
adverse tax consequences. Prior to the end of the year in which American
Rental sought to qualify again as a REIT, American Rental would be required to
make distributions sufficient to eliminate any earnings and profits
accumulated during its period of non-REIT status. Moreover, immediately prior
to the effectiveness of the election to return to REIT status, American Rental
would be treated as having disposed of all of its assets in a taxable
transaction, triggering taxable gain with respect to American Rental's
appreciated assets. In that event, however, American Rental would be permitted
to elect an alternative treatment under which those gains would be taken into
account only as and when they actually are recognized upon sales of the
appreciated property occurring within a ten-year period. American Rental would
be required to distribute at least 95% of any such recognized gains, but it
would not receive the benefit of a dividends paid deduction to reduce those
taxable gains. Thus, any such gains on appreciated assets would be subject to
"double" taxation (i.e., at the corporate level as well as the Shareholder
level when distributed).
Counsel's Opinion Relating to Qualification of American Rental as a REIT.
Subject to the following paragraphs and the qualifications, assumptions and
representations in Counsel's Tax Opinion and the ACPT Letter and the IGC
Letter, Counsel is of the opinion that (i) American Rental will be organized
in conformity with the requirements for qualification as a REIT beginning with
its taxable year ending December 31, 1998, and (ii) its proposed method of
operations described in this Proxy Statement/Prospectus will enable it to
satisfy the requirements for such qualification.
The rules governing REITs are highly technical and require ongoing
compliance with a variety of tests that depend, among other things, on future
operating results and beneficial ownership of American Rental. One of the
ownership requirements is that not more than 50% of the Common Shares may be
held, directly or indirectly, applying certain constructive ownership rules,
by five or fewer individuals at any time during the last half of each of
American Rental's taxable years (the "closely held" test), beginning with the
second taxable year for which American Rental elects to be taxed as a REIT. At
the time of the Distribution, American Rental will not meet the "closely held"
test because of the percentage ownership of the Wilson Family. James J. Wilson
and J. Michael Wilson have advised ACPT that the Wilson Family will take such
actions as may be necessary to reduce its percentage ownership to below 40%
before the last half of American Rental's second taxable year in order to
permit American Rental to qualify as a REIT. However, no member of the Wilson
Family is under an obligation to do so. Subject to the following paragraphs,
Counsel's opinion with respect to American Rental's qualification as a REIT
assumes that the Wilson Family's percentage ownership will be reduced in such
a manner that ACPT meets the "closely held" test at all times during and after
American Rental's second taxable year for which it elects to be taxed as a
REIT. However, the Wilson Family is under no obligation to do so. Thus, no
assurance can be given that American Rental will qualify as a REIT.
Counsel will not monitor American Rental's compliance with the REIT
requirements under the Code including those relating to ownership, types of
gross income, types of assets and annual distributions. While American Rental
expects to satisfy these requirements and will use its best efforts to do so,
no assurance can be given that American Rental will qualify as a REIT for any
particular year, or that the applicable law will not change and adversely
affect American Rental, ACPT, and its Shareholders. See "--Failure to Qualify
as a REIT."
As discussed above, there are several legislative proposals relating to REIT
qualification, one of which, if it were applied in its current form to ACPT
and American Rental, would prevent American Rental from qualifying as a REIT
because ACPT would own over 50% of American Rental's stock. In addition, it
appears likely that
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there will be administrative and legislative activity in areas such as the
application of the "stapled stock" rules to REITs. See "--General REIT
Qualification Requirements, Ownership Structure, and Stapled Stock Rules."
Counsel's opinion as to American Rental's qualification as a REIT is based, in
part, on Counsel's view that ACPT's ownership of the common stock of American
Rental, American Land, American Management, and IGP Group will not cause the
"stapled stock" rules to apply to American Rental and the other corporations
owned by ACPT. However, in light of the lack of existing guidance in this area
and the possibility of legislative and administrative activity in this area,
there can be no assurance that the IRS will not seek to apply to "stapled
stock" rules to the entities owned by ACPT under current law or under future
legislative proposals and, if so, that such application by the IRS would not
be upheld by a court of competent jurisdiction.
Counsel's opinion relies upon the representations made by the officers of
ACPT, American Management, American Land, American Rental, and IGP Group in
the ACPT Letter. Counsel's opinion is based on the assumption that any
successor officers of such entities will make and satisfy these
representations. These representations include, but are not limited to, the
following representations:
(i) American Rental will be operated in accordance with applicable
provisions of its Declaration of Trust and Bylaws, and as described in this
Proxy Statement/Prospectus, including, without limitation, compliance with
the representations of American Rental herein.
(ii) At all times while acting as general partner of American Housing,
American Rental will operate American Housing or cause American Housing to
be operated in accordance with the applicable provisions of applicable law,
the American Housing Partnership Agreement, and as described in this Proxy
Statement/Prospectus, including, without limitation, compliance with the
representations of American Housing herein.
(iii) At all times while acting as a member of American Housing
Management Company, American Rental will operate American Housing
Management Company or cause American Housing Management Company to be
operated in accordance with applicable provisions of applicable law, the
Operating Agreement of American Housing Management Company, and as
described in this Proxy Statement/Prospectus, including, without
limitation, compliance with the representations of American Housing
Management Company herein.
(iv) American Rental will make a timely election on IRS Form 8832 to be
classified as an association taxable as a corporation for its first taxable
year and each subsequent taxable year.
(v) American Rental, American Housing, and American Housing Management
Company shall take all actions necessary to maintain American Housing's and
American Housing Management Company's status for federal income tax
purposes either as an entity that is disregarded as an entity separate from
its owner or as a partnership and neither American Housing nor American
Housing Management Company will elect to be treated as an association
taxable as a corporation for federal tax purposes.
(vi) American Management will be operated in accordance with the
applicable provisions of its Articles of Incorporation and Bylaws and as
described in this Proxy Statement/Prospectus, including, without
limitation, compliance with the representations of American Management
herein.
(vii) ACPT, American Rental, American Housing, and American Housing
Management Company will take such actions as is necessary to cause the U.S.
Apartment Partnerships or any other entity in which American Rental or
American Housing own an interest directly or indirectly through one or more
other entities (American Housing, American Housing Management Company, the
U.S. Apartment Partnerships and such other entities hereinafter referred to
as the "REIT Subsidiaries") to comply with the representations of the REIT
Subsidiaries herein.
(viii) American Rental will elect to be treated as a REIT for federal
income tax purposes for its taxable year ending December 31, 1998, and for
each subsequent year.
(ix) American Rental and the REIT Subsidiaries shall take such actions as
are necessary to preserve American Rental's status as a REIT, including,
without limitation:
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(1) Compliance with all of the requirements set forth in Code Section
856(a), including those relating to management, beneficial ownership,
and type of entity;
(2) Compliance with the "95% of Gross Income" requirements set forth
in Code Section 856(c)(2);
(3) Compliance with the "75% of Gross Income" requirements set forth
in Code Section 856(c)(3);
(4) Compliance with the limitations on total assets requirements set
forth in Code Section 856(c)(4);
(5) Compliance with the "95% Distribution" requirements set forth in
Code Section 857(a)(1); and
(6) Compliance with such other requirements as may be necessary in
order to maintain American Rental's status as a REIT for federal tax
purposes.
(x) American Rental, American Management, and the REIT Subsidiaries each
represent that all services rendered by such entities or their agents or
employees to tenants of American Rental or the REIT Subsidiaries shall be
limited to those usually or customarily rendered in connection with the
rental of rooms or other space for occupancy only, as those terms are
defined for purposes of applying Code Section 856(d)(2) and Treasury
Regulation Section 1.512(b)-1(c)(5).
(xi) American Rental and the REIT Subsidiaries shall not engage in any
"prohibited transactions" as defined in Code Section 857(b)(6)(B)(iii),
involving a sale or other disposition of property described in Code Section
1221(1), which is not "foreclosure property," as defined in Code Section
856(e).
(xii) ACPT, American Management, American Land, American Rental, and the
REIT Subsidiaries shall take no action that would cause or result in any
income constituting rents from interests in real property (or other related
amounts described in paragraphs (B) and (C) of Code Section 856(d)(1)) that
is included in the gross income of American Rental to not qualify as "rents
from real property" for purposes of Code Sections 856(c)(2)(C) and
856(c)(3)(A).
FEDERAL INCOME TAX CLASSIFICATION OF AMERICAN HOUSING AND AMERICAN HOUSING
MANAGEMENT COMPANY.
American Housing is a Delaware limited partnership with American Rental
holding a 99% limited partner interest and American Housing Management Company
holding a 1% general partner interest. American Rental owns all of the shares
of American Housing Management Company, a Delaware corporation.
So long as all of the stock of American Housing Management Company is owned
by American Rental and American Rental qualifies as a REIT, American Housing
Management Company will be disregarded as an entity separate from American
Rental for federal tax purposes and all of the assets of American Housing
Management Company (including its 1% interest in American Housing) will be
treated as assets of American Rental. Because all of the limited and general
partnership interests of American Housing will be considered as held by
American Rental, American Housing will also be disregarded as an entity
separate from American Rental, absent an election by American Housing to be
taxed as a corporation. So long as American Rental qualifies as a REIT and
owns all of the shares of American Housing Management Company, there are no
other partners in American Housing, and American Housing and American Rental
do not elect to be treated as associations taxable as corporations, American
Housing and American Housing Management Company will not be recognized for
federal tax purposes as entities separate from American Rental and will
instead be treated as branches or divisions of American Rental for federal tax
purposes.
FEDERAL INCOME TAX CLASSIFICATION OF AMERICAN LAND AND AMERICAN MANAGEMENT.
American Land and American Management are Maryland and Delaware
corporations, respectively, which will be treated as corporations for federal
tax purposes. Neither corporation will be eligible to elect to be treated as a
partnership or to be disregarded as a separate entity for federal tax purposes
under the Regulations.
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FEDERAL INCOME TAX CLASSIFICATION OF IGP GROUP.
IGP Group is a Puerto Rico corporation that intends to qualify as a special
partnership under the Puerto Rico Code. See "Income Tax Considerations--
Certain State Income Tax and Puerto Rico Income Tax Considerations--Certain
Puerto Rico Income Tax Considerations." As a Puerto Rico corporation, IGP
Group will be classified as a corporation under Section 301.7701-2(b)(8) of
the Regulations, and therefore it will not qualify as an "eligible entity" and
cannot elect to change its classification for federal tax purposes under
Section 301.7701-3 of the Regulations (see discussion under "--Federal Income
Tax Classification of ACPT").
CERTAIN TAX CONSEQUENCES OF THE ASSET TRANSFERS.
Gain generally is not recognized on the transfer of property to a
partnership, or to a corporation, in exchange for an interest in such
partnership, or stock of such corporation. However, as discussed below, there
are exceptions to this general nonrecognition rule.
Gain will be recognized by IGC on the transfer of certain interests in the
U.S. Apartment Partnerships as a result of American Rental's assumption of
liabilities in excess of the tax basis of the property contributed to American
Rental indirectly through American Housing. IGC has estimated that
approximately $3.5 million in gain will be recognized on this transfer. Gain
will also be recognized by IGC on the transfer of the Class A interest in IGP
as a result of IGP Group's assumption of liabilities in excess of the tax
basis of property contributed. IGC has estimated that approximately $2.6
million will be recognized on this transfer. IGC has determined that all of
the gain recognized by IGC on the transfers to American Housing and IGP Group
will be allocated to IBC because such gain is attributable to unrealized gain
with respect to property originally contributed to IGC by IBC.
Under Section 704(c) of the Code, gain recognized on the sale or other
disposition of property contributed by a partner to a partnership generally
must be allocated back to the contributing partner to the extent that the fair
market value of such property exceeded its tax basis at the time of
contribution. The rules for determining whether, or to what extent, gain or
loss recognized by a partnership with respect to contributed property must be
allocated back to the contributing partner are complex, and there is little
guidance on applying such rules in situations such as the recognition of gain
by IGC upon the transfers to American Housing and IGP Group. The allocation of
such gain to IBC should be recognized as a reasonable method of applying the
rules under Code Section 704(c) that is consistent with the purposes of such
rules. However, no assurance can be given that IGC's allocation method will
not be successfully challenged. If IGC's method of allocating this gain to IBC
was determined not to be a "reasonable" method of applying Code Section
704(c), then a portion of such gain could be reallocated to Unitholders other
than IBC.
With respect to certain transfers made in exchange for stock or a
partnership interest pursuant to the Asset Transfers, IGC will transfer a
contractual obligation to transfer distributions received from certain
partnerships to American Housing (except for certain distributions that will
be transferred to American Land) on behalf of ACPT and an obligation to
transfer its interest in such partnerships to American Housing on behalf of
ACPT upon the receipt of consent to the transfers of such interests. With
respect to other transfers pursuant to the Asset Transfers, IGC will transfer
a portion of its interest in certain partnerships and an obligation to
transfer the remaining portion of its interest in such partnerships to
American Housing on behalf of ACPT a year and a day after such initial
transfers. See "Transactions with Related Parties--Staggered Transfer of
Partnership Interests to American Housing." Except as discussed above, IGC
will take the position that these transfers in exchange for stock or a
partnership interest will qualify for nonrecognition treatment. However, such
nonrecognition treatment is not free from doubt and there can be no assurance
that this position will not be successfully challenged by the IRS. The IRS
could take the position that the transfer of such contractual obligations or
the subsequent transfer of distributions or a partnership interest pursuant to
such obligations will not qualify for nonrecognition treatment. If any such
transfer does not qualify, gain would be recognized by IGC in the amount that
the fair market value of the property transferred by IGC in the nonqualifying
transfer exceeds IGC's tax basis in such property. Such gain would be
allocated to IBC to the extent that it is attributable to appreciated
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property originally contributed by IBC and to the extent such gain is not
attributable to such property it would be allocated pro rata among all of the
Unitholders.
Gain generally is recognized when appreciated property is transferred by a
United States person to a foreign corporation in the amount of the excess of
the fair market value over the basis of the transferred property. There is an
exception to this gain recognition rule in the case of property transferred to
a foreign corporation for use by that foreign corporation in the active
conduct of a trade or business outside of the United States. However, this
"active conduct" exception does not apply to certain property, such as certain
intangible property and inventory (and similar property described in Code
Section 1221(1) and (3)). For purposes of applying these rules to a transfer
of a partnership interest, such transfer generally is treated as a transfer of
a pro-rata share of the assets of the partnership represented by such
interest.
IGC will transfer property to IGP Group, directly and indirectly through
subsidiary partnerships, that is currently used or is expected to be used in a
rental business in Puerto Rico. Puerto Rico land that will not be used in the
rental business and that is instead held for sale to customers will not
qualify for the "active conduct" exception to the general gain recognition
rule. Such land has been transferred to American Land, a domestic corporation,
indirectly through the Class B interest in IGP.
The determination of whether appreciated assets that are transferred to a
foreign corporation qualify for the "active conduct" exception to the general
gain recognition rule is made on the basis of all of the facts and
circumstances. Property generally will be considered to be used in the "active
conduct" of a leasing business for purposes of this exception if: (1) the
lessor, through its own officers or staff of employees, performs substantial
marketing, customer service, repair and maintenance, and other substantial
operational activities with respect to the leased property; (2) the property
is not used in the United States; and (3) the transferee has need for
substantial investment in assets of that type. ACPT, IGP Group and IGP have
represented that IGP and its employees will continue to provide management and
operational services for the Puerto Rico Apartment Partnerships in
substantially the same manner as they do at present. Counsel will not monitor
compliance with such representations. Whether the transfer will qualify for
the "active conduct" exception will depend on the extent and nature of the
services to be provided in the future, and on the application of general rules
to a more complex ownership structure than was anticipated in such rules. For
example, it is clear that in the case of a transfer of a partnership interest,
the "active conduct" test is applied by "looking through" the partnership to
the underlying assets. It is less clear whether the "look through" approach
also applies to the activities conducted by the employees of the partnership,
and how such a rule would apply in the case of tiered partnerships.
There can be no assurance that the IRS will not successfully challenge
whether all, or a portion, of the appreciated assets transferred directly or
indirectly to IGP Group will qualify for the "active conduct" exception and
seek to apply the general rule that gain is recognized on such transfers to
the extent that the fair market value of such property exceeds its adjusted
tax basis. In addition, there can be no assurance that the IRS will not
successfully challenge whether any of the LDA assets transferred to American
Land indirectly through the Class B interests in IGP will be treated as a
transfer to a foreign corporation that is subject to the recognition of gain
to the extent that the fair market value of such property exceeds its adjusted
tax basis. In either event, the amount of gain that would be recognized by IGC
would be significant and each IGC Unitholder would be required to include its
share of such gain.
IGC will include in its taxable income its share of income, gain, loss, and
deduction with respect to certain retained interests in two U.S. Housing
Partnerships even though it is contractually obligated to transfer all
distributions it receives with respect to such interests to American Housing
or American Land. See "Transactions with Related Parties--Staggered Transfer
of Partnership Interests to American Housing." Because these transfers will be
treated as made in connection with, or as, contributions to capital, IGC will
not receive a deduction with respect to such transfers.
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Although IGC generally is required to distribute at least 55% of its taxable
income to the Unitholders, IGC may satisfy this obligation with a distribution
of property other than cash (such as the Common Shares). If IGC does not
distribute sufficient cash to pay the Unitholder's tax liabilities with
respect to the Unitholder's share of IGC's taxable income, the Unitholder may
have to use funds from other sources or sell the property distributed by IGC,
including Common Shares. Sale of Common Shares may give rise to taxable gain.
See "Income Tax Considerations--Federal Income Tax Considerations--Federal
Income Taxation of ACPT and Shareholders--Sale or Exchange of Common Shares."
In addition, following the Restructuring it is possible that IGC may
recognize taxable income without receiving sufficient cash to enable IGC to
make a distribution to the IGC Unitholders in an amount at least equal to the
IGC Unitholder's tax liability arising from their share of IGC taxable income.
Further, it is possible that IGC may not make a cash distribution regardless
of whether significant cash is available or regardless of any obligations to
make such a distribution.
FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION.
A Shareholder will not recognize gain or loss upon receipt of Common Shares
in the Distribution. Gain is not recognized on a distribution of property from
a partnership to a partner except to the extent that any money distributed
exceeds the adjusted basis of such partner's interest in the partnership
immediately before the distribution.
Generally, a distribution of a "marketable security" is treated as a
distribution of money equal to the fair market value of such marketable
security, for purposes of determining whether gain is recognized on such
distribution. The amount treated as money upon a distribution of a marketable
security is reduced by the excess of the distributee partner's proportionate
share of (i) net gain that would be recognized if all of the partnership's
marketable securities would have been sold immediately before the
distribution, over (ii) net gain that would be recognized if all of the
partnership's marketable securities would have been sold immediately after the
distribution. However, these provisions do not apply to the distribution of a
marketable security if the security was acquired by the partnership in a
nonrecognition transaction and (1) the value of any marketable securities and
money exchanged by the partnership in the nonrecognition transaction is less
than 20% of the value of all the assets exchanged by the partnership in the
nonrecognition transaction, and (2) the partnership distributed the security
within five years of either the date the security was acquired by the
partnership or, if later, the date the security became marketable. The Common
Shares should qualify for this exception because they were acquired by IGC in
nonrecognition transactions pursuant to the Asset Transfers within the
applicable five year period and IGC has represented that the value of money
and marketable securities was less than 20% of the value of all assets
exchanged. If so, the Distribution of Common Shares will not be treated as a
distribution of money under these provisions.
A Shareholder's initial tax basis in his or her Common Shares generally will
be equal to IGC's tax basis in those Common Shares. If, however, IGC's tax
basis in those Common Shares exceeds the Shareholder's adjusted tax basis in
his or her IGC Units, the Shareholder's initial tax basis in his Common Shares
generally will be equal to his or her adjusted tax basis in his or her IGC
Units immediately before the Distribution reduced by any money received in the
Distribution. Each Shareholder's adjusted tax basis in his or her IGC Units
will be reduced by an amount equal to his or her initial basis in the Common
Shares.
A Shareholder's holding period for the Common Shares will include IGC's
holding period for those Common Shares. ACPT will provide Shareholders with
information on the holding period of Common Shares received in the
Distribution. IGC will not recognize gain or loss upon the Distribution.
A Shareholder who receives cash in lieu of fractional Common Shares will
recognize gain. The amount of gain recognized will not exceed the amount of
cash received. ACPT will provide Shareholders with information indicating the
amount of any gain which must be recognized on the receipt of cash in lieu of
fractional Common Shares.
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FEDERAL INCOME TAXATION OF ACPT AND SHAREHOLDERS.
General.
As a partnership for federal income tax purposes, ACPT is not subject to
federal income tax. ACPT has adopted the accrual method of accounting and has
adopted the calendar year as its taxable year.
Each item of ACPT's income, gain, loss, deduction or credit will flow
through to the Shareholders. Each Shareholder must report his or her allocable
share of these items on his or her individual tax return. Such items generally
are allocated among the Shareholders in proportion to the number of Common
Shares held by each Shareholder and for the period for which each Shareholder
holds such Common Shares. ACPT must furnish each Shareholder of record, on the
form prescribed by the IRS, the information necessary to prepare the
Shareholder's federal income tax returns with respect to income derived from
his or her interest in ACPT.
Each Shareholder is taxed on his or her allocable share of ACPT's taxable
income or loss, without regard to distributions of cash or property from ACPT
to the Shareholder. Although ACPT is obligated under its Declaration of Trust
to distribute annually to Shareholders, in cash and/or property, an amount
equal to 45% of the net taxable income of ACPT allocated to Shareholders less
the amount of certain taxes paid by ACPT, there can be no assurance that ACPT
will distribute to a Shareholder sufficient cash for the Shareholder to
satisfy his or her federal income tax liability with respect to his or her
allocable share.
It is anticipated that ACPT's income will consist almost entirely of
dividends from American Rental, American Land, American Management, and IGP
Group.
Tax Basis of Common Shares.
A Shareholder's initial tax basis in his or her Common Shares generally will
be equal to IGC's tax basis in those Common Shares (unless IGC's tax basis in
the Common Shares exceeds the Shareholder's tax basis in his or her IGC
Units). See "--Federal Income Tax Consequences of the Distribution." The
Shareholder's tax basis will be increased by (i) his or her allocable share of
ACPT's income (including income that is not taxable) and (ii) his or her share
of any increase in non-recourse liabilities incurred by ACPT (i.e., any
liability of ACPT for which no partner has any personal liability). The
Shareholder's tax basis will be reduced (but not below zero) by (i) any cash
distributed to the Shareholder; (ii) ACPT's tax basis in any property
distributed to the Shareholder; (iii) the Shareholder's allocable share of
ACPT's losses; (iv) his or her share of any decrease in non-recourse
liabilities incurred by ACPT; and (v) his or her share of non-deductible
expenditures of ACPT that are not properly chargeable to capital. There may be
other special situations affecting the tax basis.
Income and Loss Allocations.
The manner in which items of ACPT's income, gains, losses, deductions,
credits and other tax items are allocated among the partners (including the
Shareholders) pursuant to the provisions of the Declaration of Trust is
described in detail above. Such allocations are recognized for federal income
tax purposes if (i) they are in accordance with the partners' respective
interests in ACPT or have "substantial economic effect" within the meaning of
the Code and applicable Regulations, and (ii) they are applied without
retroactive effect.
ACPT's allocations to the Shareholders pursuant to the Declaration of Trust
will be recognized for federal income tax purposes to the extent that such
allocations do not result in the Shareholders having deficits in their capital
accounts. It is not anticipated that ACPT will generate, nor is it an
objective of ACPT to generate, losses that could result in deficit capital
accounts. However, it is possible that ACPT could make a distribution that
causes a Shareholder to have a deficit capital account.
If any allocation of ACPT's items pursuant to the Declaration of Trust is
determined not to be in accordance with the Shareholders' interests in ACPT
(or otherwise not to have "substantial economic effect" under the Code and
Regulations), then ACPT's items would be allocated among the partners in
accordance with their "interests
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in ACPT" based on all the relevant facts and circumstances. Such a
determination could result in the income, gains, losses, deductions, or
credits allocated under the Declaration of Trust being reallocated. Such
reallocation, however, would not affect distributions under the Declaration of
Trust. Thus, such a reallocation could result in an increased share of taxable
income being allocated to a Shareholder, without any corresponding increase in
cash distributions over those contemplated in the Declaration of Trust.
The Declaration of Trust authorizes the Board of Trustees to make any
changes in ACPT's allocation provisions determined to be necessary under the
Regulations in order for ACPT's allocation provisions to be respected for
federal income tax purposes. It is possible that such a change in the
allocation provisions could result in additional taxable income being
allocated to existing Shareholders, without any corresponding increase in cash
distributions to such Shareholders. However, no provision may be added that
would require the Shareholders to restore negative capital accounts. In
addition, in implementing any such change, the Board of Trustees is to use its
best efforts to ensure that the underlying economic arrangement intended by
the Declaration of Trust--that all distributions and allocations be in
accordance with percentage interests in ACPT--is preserved to the extent
practicable.
Coordination of Allocations and Distributions.
ACPT has adopted the daily closing-of-the-books convention in allocating
ACPT's income and loss. In addition, ACPT, American Land, American Management,
American Rental, and IGP Group expect to coordinate the declaration and
payment of dividends and other distributions from such entities in such a
manner that all dividends will be paid by the lower-tier entities to ACPT on
the same day that ACPT declares a dividend to the Shareholders of record on
such date. Thus, each Shareholder's dividend distribution from ACPT will
correspond with their allocable share of ACPT's taxable income associated with
the receipt of dividends from the other entities. If dividends are not so
coordinated, it is possible that if a Shareholder sells or otherwise disposes
of his or her Common Shares prior to a record date, ACPT would make the cash
distributions to the Shareholder's transferee even though the Shareholder
would be taxed on the income.
U.S. Shareholders that own (after application of certain attribution rules)
10% or more of the Common Shares ("10% Shareholders") may be required to
include in income certain amounts earned by IGP Group even where IGP Group
does not actually distribute these amounts to ACPT. Therefore, 10%
Shareholders should consult their own tax advisors regarding the tax
consequences of the Distribution, holding and disposition of Common Shares.
Section 704(c) Allocations.
Under Section 704(c) of the Code, tax items relating to the unrealized gain
(or loss) ("Precontribution Gain (or Loss)") with respect to property
contributed ("Contributed Property") by a partner ("Contributing Partner") to
a Partnership must be allocated to the Contributing Partners when the
partnership sells or otherwise disposes of its interests in the Contributed
Property. The Precontribution Gain (or Loss) is generally equal to the
difference between the fair market value of the Contributed Property at the
time of the contribution and the Contributing Partner's tax basis in the
property at that time. See "--Certain Tax Consequences of the Asset
Transfers."
The Board of Trustees will determine the amount of Precontribution Gain (or
Loss) allocable to each asset originally contributed to IGC or contributed by
IGC to ACPT, and each Shareholder's share thereof. These determinations may
affect substantially the amount and timing of gain or loss recognized by
Shareholders in the event that ACPT were to sell its interest in American
Land, American Management, American Rental, or IGP Group.
Section 754 Election.
ACPT will not make an election under Section 754 of the Code to adjust the
tax basis of its property upon sales and certain other transfers of Common
Shares (Section 743 of the Code) or in the event of a distribution of
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property to the Shareholders (Section 734 of the Code). Therefore, persons who
purchase Common Shares from Shareholders will not receive a special basis
adjustment with respect to their share of property held by ACPT to reflect the
purchase price of such Common Shares. Thus, if ACPT sells all or a portion of
its interests in the lower-tier entities, a Shareholder who purchases Common
Shares after the Distribution will recognize his or her proportionate share of
ACPT's gain or loss regardless of whether such gain or loss is attributable to
appreciation or depreciation in the value of the interests sold by ACPT that
occurred before the Shareholder acquired its Common Shares. If ACPT were to
sell its interests in American Land, American Management, American Rental, or
IGP Group, the proportionate share of the gain or loss recognized by a
Shareholder could vary depending on whether or not such Shareholder purchased
its Common Shares from a person that originally contributed property to IGC.
It is possible that in certain circumstances, the trading market for the
Common Shares could be adversely affected because the Common Shares were not
fungible.
Passive Loss and Income.
It is not anticipated that ACPT will have a taxable loss for any taxable
year. All of ACPT's gross income from dividends (including all distributions
from American Rental) or from the disposition of ACPT's interests in the
lower-tier entities will constitute "portfolio income" and will not be
included in "passive activity gross income" under the rules relating to
restrictions on passive activity losses.
Taxation of Foreign Investors.
The rules governing federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships and other foreign
Shareholders (collectively, "Non-U.S. Shareholders") are complex and no
attempt will be made herein to discuss such rules. Prospective Non-U.S.
Shareholders should consult with their own tax advisers to determine the
impact of federal, state and local income tax laws with regard to an
investment in Common Shares, including any reporting requirements, as well as
the tax treatment of such an investment under the laws of their home country.
Taxation of Shareholder Distributions Other than in Liquidation.
A Shareholder will not recognize taxable income when he or she receives a
cash distribution from ACPT if the amount of the distribution does not exceed
the Shareholder's tax basis in his or her Common Shares. See "--Tax Basis of
Common Shares." Because of the expected coordination of the declaration and
payment of dividends and other distributions between ACPT and the entities in
which it holds an interest, each Shareholder's basis in its Common Shares
should be increased by the Shareholder's share of ACPT's taxable income
associated with the receipt of a cash distribution from ACPT. See "--
Coordination of Allocations and Distributions." Generally, ACPT anticipates
that the increase in basis should be equal to the amount of the cash
distribution. However, if the cash distributed to the Shareholder exceeds the
Shareholder's tax basis in his or her Common Shares, the excess will be
taxable to the Shareholder as though it were gain on the sale or exchange of
his or her Common Shares. See "--Sale or Exchange of Common Shares." A
Shareholder generally will not recognize income upon receipt from ACPT of a
distribution of property other than a distribution of money or a
disproportionate distribution of marketable securities. A distribution may
reduce the Shareholder's tax basis in his or her Common Shares. See "--Tax
Basis of Common Shares."
Foreign Tax Credit.
If IGP Group and the Puerto Rico Apartment Partnerships qualify for "pass-
through" treatment as special partnerships for Puerto Rico income tax purposes
under Puerto Rico law, they will not be subject to income tax in Puerto Rico.
Instead, IGP Group's income (primarily in the form of rental payments with
respect to apartments and other real property located in Puerto Rico and
including IGP Group's share of the income of each of the Puerto Rico Apartment
Partnerships) will be taxable to ACPT. ACPT will be treated as a foreign
corporation for Puerto Rico income tax purposes and will be subject to Puerto
Rico income tax on its allocable share of IGP Group's income. See "Certain
State Income Tax and Puerto Rico Income Tax Considerations--Certain Puerto
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Rico Income Tax Considerations." To the extent that ACPT pays Puerto Rico
taxes with respect to its Puerto Rico source income, the Shareholders will be
considered to have paid their allocable share of such Puerto Rico tax which,
as discussed below, may give rise to a foreign tax credit or a deduction for
federal income tax purposes. However, if IGP Group were treated as a
corporation for Puerto Rico tax purposes, it would be subject to Puerto Rico
income tax on its Puerto Rico source income and the Puerto Rico income tax
paid by IGP Group would not be treated as taxes paid by ACPT and would not
give rise to foreign tax credits or deductions to the Shareholders. In
addition, such foreign tax credits or deductions generally would not be
available to the Shareholders if ACPT were treated as a corporation for U.S.
tax purposes, regardless of how IGP Group is treated for Puerto Rico tax
purposes.
For United States tax purposes, each Shareholder will be considered to have
paid his or her allocable share of any Puerto Rico income taxes paid by ACPT.
Puerto Rico taxes treated as paid by such Shareholder or allocable to such
Shareholder will be considered foreign income taxes paid by such Shareholder
with respect to which such Shareholder may claim a foreign tax credit (subject
to applicable limitations) or a deduction for United States federal income tax
purposes. The limitation on the foreign tax credit is designed to ensure that
a United States taxpayer cannot use foreign taxes to offset more of that
taxpayer's United States tax liability for a taxable year than is attributable
to foreign source income (e.g., because the effective rate is higher than
United States rates). For certain Shareholders, the marginal Puerto Rico
income tax rate may be higher than the marginal United States tax rate.
Accordingly, for Shareholders whose only source of foreign income is ACPT, the
taxes payable to Puerto Rico by ACPT might not be fully creditable as a result
of this limitation under the Code. Taxable income of ACPT for federal income
tax and Puerto Rico income tax purposes also may differ because each tax is
calculated under the respective tax accounting and entity classification
provisions of the jurisdictions that in some cases are not the same. For
example, for Puerto Rico income tax purposes IGP Group intends to qualify as a
special partnership and the tax items of IGP Group would then flow through to
ACPT for Puerto Rico income tax purposes as a distributive share of income
whether or not cash is distributed. However, for federal tax purposes, IGP
Group is treated as a corporation and none of IGP Group's tax items will flow
through to ACPT and ACPT generally will treat cash distributed from IGP Group
as a dividend.
The foreign tax credit limitations must also be computed separately for
certain categories of income. For example, separate computations generally
would be made for passive income such as dividends and for "active" income
earned in the conduct of a trade or business. The basic limitation is that the
foreign tax credit claimed with respect to a particular category of income
cannot exceed the amount of United States taxes imposed with respect to the
taxpayer's worldwide income multiplied by a fraction, the numerator of which
is the total foreign source taxable income in that category and the
denominator of which is the total amount of the taxpayer's worldwide income.
A Shareholder's Puerto Rico source income with respect to his or her
ownership of Common Shares likely will consist of the Shareholder's
distributive share of dividends from IGP Group under federal income tax rules.
In contrast, the Shareholder's distributive share of ACPT's Puerto Rico taxes
will have been paid in accordance with applicable Puerto Rico tax rules with
respect to ACPT's distributive share of the rental and other income earned by
IGP Group and the Puerto Rico Apartment Partnerships. For foreign tax credit
limitation purposes, the amount and category of foreign source income is
determined under United States tax principles even though Puerto Rico taxed
the income earned there according to its own rules. Since the United States
recognizes IGP Group as a corporation and not as a partnership, the
Shareholders' foreign source income from ACPT for foreign tax credit
limitation purposes likely will be passive income in the amount of the
Shareholder's distributive share of the dividends paid to ACPT by IGP Group.
It is possible, however, that if the Puerto Rico tax rate imposed on the
dividends exceeds the U.S. tax rate the dividends would be subject to the
"high tax kick out rule" and be included in the overall limitation category.
The amount of foreign taxes paid with respect to a particular category of
income includes only those foreign taxes related to income in that category.
The IRS will likely associate the Shareholders' distributive shares of the
Puerto Rico taxes paid by ACPT with the Shareholders' shares of the dividends
paid by IGP Group to ACPT.
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Thus, a Shareholder's distributive share of Puerto Rico taxes likely will be
allocated to the passive income category for purposes of determining the
foreign tax credit limitation.
However, there is a risk that the Puerto Rico taxes would be associated with
the "general limitations" category (and not the passive income category)
because it is associated with "active" income that generally would not be
subject to tax under United States tax rules (i.e., because the United States
does not generally tax shareholders on the undistributed income of the
corporations in which they invest). In this case, the Puerto Rico tax would be
treated as imposed with respect to "general limitations" income, but a
Shareholder may not be eligible for a foreign tax credit with respect to this
tax unless he or she has other foreign source taxable "general limitations"
income against which to apply the credit.
Termination of ACPT for Tax Purposes.
If 50% or more of the capital and profits interests in ACPT are sold or
exchanged within a twelve-month period, ACPT will be deemed to have been
terminated for federal income tax purposes. In this regard, however, a Common
Share that changes hands several times during a twelve-month period will be
counted only once for purposes of determining whether a termination has
occurred.
If ACPT is considered to have terminated, ACPT would be deemed to have
contributed its assets and liabilities to a new partnership in exchange for an
interest in the new partnership, and immediately thereafter the terminated
partnership would be deemed to have distributed the interests in the new
partnership to the Shareholders of record as of the date of the termination.
Generally, a Shareholder would not recognize any taxable gain or loss as a
result of the deemed pro rata distribution of new partnership interests
incident to a constructive termination of ACPT. See "--Federal Income Tax
Considerations--Federal Income Taxation of ACPT and Shareholders--Dissolution
of ACPT." If the Shareholder's taxable year were other than the calendar year,
the inclusion of more than one year of ACPT's income in a single taxable year
of the Shareholder could result. Finally, a termination of ACPT could cause
ACPT or its assets to become subject to any unfavorable statutory or
regulatory changes enacted prior to the termination but previously not
applicable to ACPT or its assets because of protective "transitional" rules.
There could be other federal income tax consequences, favorable and
unfavorable, resulting from a termination of ACPT.
Under the 1997 Act, regulatory authority was granted to provide for gain
recognition on a transfer of appreciated property to a partnership in cases
where unrealized gain could be transferred to a foreign partner. It does not
appear that this provision would apply to ACPT or the Shareholders. However,
no regulations have been issued under this provision.
Backup Withholding.
Distributions to Shareholders whose Common Shares are held on their behalf
by a "broker" may constitute "reportable payments" under the federal income
tax rules regarding "backup withholding." Backup withholding, however, would
apply only if (i) the Shareholder failed to furnish his or her Social Security
number or other taxpayer identification number ("TIN") to the "payor" (e.g.,
the "broker"), (ii) the IRS notified the payor that the Shareholder furnished
an incorrect TIN, (iii) there were a "notified payee certification failure" as
described in the Code, or (iv) there was a failure by the Shareholder to
certify that he or she is not subject to backup withholding. If backup
withholding were applicable to a Shareholder, the payor would be required to
withhold 31% of each distribution to such Shareholder and to pay such amount
to the IRS on behalf of such Shareholder. The amount withheld pursuant to
backup withholding is not itself an additional tax. Rather, the tax liability
of the Shareholder subject to backup withholding will be credited with the
amount of tax withheld.
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Sale or Exchange of Common Shares.
A Shareholder will realize gain or loss on a sale or other disposition of
his or her Common Shares based on the difference between the amount realized
on the sale and the Shareholder's adjusted tax basis for the Common Shares.
The amount realized includes the Shareholder's share of ACPT's liabilities. A
selling Shareholder's tax basis in the Common Shares will be adjusted for the
amount of income or loss allocable to, and distributions made to, such
Shareholder in the taxable year in which the disposition occurs. See "--Tax
Basis of Common Shares." To the extent the gain or loss is not treated as
ordinary income or loss under the rules described below, the gain or loss
ordinarily will be treated as capital gain or loss and a long-term capital
gain or loss if the holding period for the Common Shares is more than one
year.
The gain or loss may give rise to ordinary income or loss to the extent it
is attributable to "inventory items" or "unrealized receivables" (as defined
in Section 751 of the Code). "Unrealized receivables" include rights to
payment for services rendered or to be rendered, franchises, trademarks,
Section 1245 property, Section 1250 property and stock in certain foreign
corporations as described in Section 1248.
Under an IRS ruling, a Shareholder might be required to maintain an
aggregate adjusted tax basis in all of his or her Common Shares even if the
Shareholder acquired Common Shares in separate transactions. If this rule
applies to Shareholders, when a Shareholder disposes of a portion of his or
her Common Shares, the Shareholder would have to allocate his or her aggregate
tax basis between the disposed-of Common Shares and the retained Common Shares
by some equitable apportionment method. In that case, it effectively would
preclude a Shareholder from controlling the timing of the recognition of the
inherent gain or loss in his or her Common Shares by selecting specific Common
Shares for sale. It is unclear how a Shareholder would determine the holding
period of the disposed-of Common Shares in such circumstances. Because of the
uncertainties relating to the holding period and basis, a Shareholder
considering a subsequent purchase of additional Common Shares should consult
his or her own tax advisor as to the possible consequences of the subsequent
purchases.
The trading market for Common Shares could be adversely affected by the lack
of a special basis adjustment for purchasers of Common Shares because ACPT
will not make an election under Code Section 754.
Dissolution of ACPT.
Upon the dissolution and liquidation of ACPT, any assets remaining after
payment of, or provision for payment of, ACPT's debts and liabilities will be
distributed to ACPT's partners (including Shareholders) of record first in
proportion to the positive balances in their capital accounts and then pro
rata in accordance with their percentage interests. It is anticipated that the
Shareholders' capital accounts and percentage interests will be in proportion
to the Shareholders' Common Shares and that liquidating distributions will
therefore be pro rata in accordance with Common Shares.
A Shareholder generally will not recognize gain or loss on a liquidating
distribution. However, a Shareholder will recognize gain to the extent that
the shareholder receives money (including his proportionate share of any
reduction in ACPT's non-recourse liability) in excess of his or her basis in
the Common Shares. The gain will be a capital gain, except to the extent of
any "unrealized receivables" and "inventory items." See "--Federal Income Tax
Considerations--Federal Income Taxation of ACPT and Shareholders--Sale or
Exchange of Common Shares."
A Shareholder may recognize a capital loss on liquidation only if the
Shareholder receives only money, "unrealized receivables," and "inventory
items." The loss may not exceed the difference between (i) the Shareholder's
adjusted tax basis in his or her Common Shares and (ii) the sum of (x) the
amount of money received and (y) his or her tax basis of such unrealized
receivables and inventory items. If the Shareholder also receives any property
other than money, unrealized receivables or inventory items, he or she will
not recognize any loss upon the distribution. He will have a tax basis in the
property received in liquidation equal to his or her adjusted tax basis in his
Common Shares reduced by any money distributed to the Shareholder.
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Puerto Rico Shareholders.
Individuals who are bona fide residents of Puerto Rico during the entire
taxable year ("Puerto Rico Residents") will be subject to United States income
tax at applicable United States rates with respect to their allocable share of
ACPT's income derived from United States sources. A corporate Shareholder
organized under the laws of Puerto Rico ("Puerto Rico Corporation") will be
subject to United States income tax at applicable United States rates with
respect to its allocable share of ACPT's income that is effectively connected
with the conduct of a United States trade or business. A Puerto Rico
Corporation will generally be subject to a 30% tax on its allocable share of
ACPT's "fixed or determinable annual or periodic gains, profits, and income"
from United States sources. Distributions made by IGP Group to ACPT should not
be United States source income or effectively connected with a United States
trade or business. ACPT generally is required to withhold U.S. tax at the rate
of 30% with respect to a Puerto Rico Resident's or a Puerto Rico Corporation's
allocable share of dividends received from American Land, American Management,
or American Rental.
Under the Foreign Investment in Real Property Tax Act of 1980, as amended
("FIRPTA"), ACPT must withhold 35% of the amount of a Puerto Rico
Corporation's allocable share of ACPT's gain from the sale of a United States
real property interest ("USRPI"), including a disposition of an interest in
certain entities where over 50 % of the value of such entity's assets consist
of U.S. real property interests. A USRPI generally is an interest in real
property located in the United States or Virgin Islands. An interest in a
"domestically-controlled REIT" is not a USRPI. The term "domestically-
controlled REIT" means a REIT in which at all times during a specified testing
period (generally, the lesser of the 5-year period ending on the date of the
disposition or the period in which the REIT was in existence) less than 50% in
value of the stock was held directly or indirectly by foreign persons.
Any distribution by a REIT to a non-resident alien individual or foreign
corporation, to the extent attributable to gain from sales or exchanges by the
REIT of USRPI, is treated as gain recognized by such non-resident alien
individual or foreign corporation from the sale or exchange of a USRPI. Puerto
Rico Residents and Puerto Rico Corporations will be subject to withholding on
amounts attributable to capital gains dividends distributed by American
Rental. In certain circumstances, a distribution of a USRPI to the
Shareholders could give rise to a recognition of any unrealized gain (the
excess of the fair market value over basis) of the USRPI distributed,
multiplied by the "foreign ownership percentage". The term "foreign ownership
percentage" means that percentage of the stock of the REIT which was held
(directly or indirectly) by foreign persons at the time during the applicable
testing period during which the direct and indirect ownership of stock by
foreign persons was greatest.
The United States Department of the Treasury may promulgate Regulations
reducing the withholding rate to 28%, probably only in the case of
individuals. Future Regulations also may require ACPT to withhold 10% of the
fair market value of any USRPI that is distributed to a foreign person if the
transaction would constitute a taxable distribution under FIRPTA.
A Puerto Rico Resident generally will be subject to United States tax on the
gain or loss resulting from the disposition of a Common Share only to the
extent that the gain or loss is from United States sources. As a general rule,
any gain or loss from the disposition of personal property is not United
States source income if the seller is not a United States resident. For most
purposes, partnership interests are regarded as personal property. However, it
is possible that a disposition of a partnership interest would be considered a
disposition of partnership assets rather than partnership interests. The IRS
has ruled that a partner was subject to United States tax on the gain or loss
resulting from the disposition of a partnership interest to the extent that
the partner's allocable share of the partnership's unrealized gain or loss is
effectively connected with a United States trade or business when the
partnership was engaged in a United States trade or business through a fixed
place of business or a permanent establishment and was not a publicly traded
partnership. The ruling does not indicate whether the same holding would
obtain in the case of a disposition of an interest in a publicly traded
partnership or whether gain or loss on such an interest would be sourced as
United States or foreign, based on the assets and activities of the
partnership. If the holding were to apply, Puerto Rico Residents and Puerto
Rico Corporations disposing of
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Common Shares could be subject to tax with respect to unrealized gain or loss
in the stock of one or more of the four entities whose stock ACPT controls but
only to the extent that more than 50% of the entity's assets consist of
USRPIs. Generally, the determination of the residence of the seller is made at
the partner level, except as provided in Regulations that have not yet been
promulgated. Legislative history indicates that Regulations may provide that
the determination will be made at the partnership level in the case of a
publicly traded partnership.
In general, Puerto Rico Corporations that have gain from the sale of Common
Shares are subject to United States taxation at capital gains rates only if
the gain is effectively connected with the conduct of a United States trade or
business. Under FIRPTA, if a Common Share is considered a USRPI, the gain or
loss from the disposition of the Common Share is treated as effectively
connected with a trade or business conducted in the United States. A Common
Share will be considered a USRPI generally if at any time during the five-year
period preceding the disposition (i) the Puerto Rico Corporation owns directly
or by attribution more than 5% of ACPT's Common Shares and (ii) the fair
market value of ACPT's USRPIs was at least 50% of the fair market value of
ACPT's worldwide real property interests and ACPT's other assets used in a
trade or business.
As discussed above, if ACPT becomes engaged in a United States trade or
business through a fixed place of business or a permanent establishment, any
gain or loss recognized by a Puerto Rico Corporation upon the disposition of a
Common Share may be treated as effectively connected with the conduct of a
United States trade or business to the extent that the Shareholder's allocable
share of ACPT's unrealized gain or loss is effectively connected with such
United States trade or business.
Certain Federal Income Tax Consequences to Tax Exempt Organizations.
It is anticipated that virtually all of ACPT's taxable income will consist
of dividends (including REIT dividends). See "--Federal Income Tax
Classification of ACPT." Therefore, a tax exempt entity that is a Shareholder
generally will not be subject to tax on distributions from ACPT or gain
realized on the sale of Common Shares. However, there are circumstances where
a tax exempt entity may be subject to tax. For example, a tax exempt entity
may be subject to tax to the extent that it has financed the acquisition of
its Common Shares with "acquisition indebtedness" within the meaning of the
Code. Consequently, tax exempt entities should consult their own tax advisors
regarding the Distribution, and the holding and disposition of Common Shares.
Information Return Filing Requirements.
A Shareholder who sells or exchanges a Common Share must notify ACPT of such
transaction in writing within 30 days of the transaction (or, if earlier, by
January 15 of the year following the calendar year in which the transaction
occurs). The transferor Shareholder does not have to notify ACPT if a broker
must provide an information return under Section 6045 of the Code. The
transferor Shareholder must provide (i) his name and address and the name and
address of the transferee; (ii) his TIN and, if known, the transferee's TIN;
and (iii) the date of the sale or exchange. If a transferor Shareholder fails
to notify ACPT, he or she may be subject to a $50 penalty for the failure.
In addition, ACPT must notify the IRS of any sale or exchange of a Common
Share (of which ACPT was notified or had knowledge). ACPT does not have to
notify the IRS if a broker must provide an information return under Section
6045 of the Code. If ACPT knows of a sale or exchange but does not know who is
the beneficial owner of the Common Shares, it may treat the record-holder as
the transferor or the transferee as the case may be. ACPT must report to the
IRS the names, addresses, and TINs of ACPT, the transferee and the transferor,
the date of the transaction, and any additional information required by the
applicable information return or its instructions. ACPT also must provide that
information to the transferor and the transferee. In addition, ACPT must
inform the transferor and the transferee that this information has been given
to the IRS, that a portion of any gain or loss must be treated as ordinary
income or loss and that the transferor is required to attach a statement
relating to the sale or exchange to his or her income tax return.
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If ACPT fails to furnish the required information to the transferor or the
transferee, it may be subject to a penalty of $50 per failure up to an annual
maximum of $100,000. If ACPT fails to provide the required information to the
IRS, ACPT would be subject to a penalty of $50 per failure up to an annual
maximum of $100,000. Because ACPT will be a publicly traded partnership, it is
uncertain whether ACPT will be able to comply with these requirements in every
instance.
Electing Large Partnerships.
Partnerships with 100 or more partners generally are permitted to make an
irrevocable election ("Electing Large Partnerships") to be subject to certain
simplified "flow through," reporting, and audit provisions for federal income
tax purposes for partnership tax years beginning after December 31, 1997.
Electing Large Partnerships are subject to special rules for the computation,
treatment, and reporting of certain partnership tax items. In addition,
Electing Large Partnerships are subject to special rules relating to the
administrative and judicial review of adjustments with respect to partnership
tax items, and relating to the liability of partners for the payment or refund
of federal income taxes resulting from such an adjustment. ACPT has no current
plans to make an election to be subject to the rules applicable to Electing
Large Partnerships.
Audit of Partnership Tax Returns and Further Proceedings.
Although ACPT is not required to pay any federal income tax, it is required
to file an information tax return for each taxable year setting forth its
income, gains, losses, deductions, credits, tax preference items and its other
applicable tax attributes. The IRS may audit the tax treatment of ACPT's items
of income, loss, deduction, and credit at the partnership level in a unified
administrative proceeding. The IRS will make any adjustments it believes to be
appropriate. An audit of ACPT may also result in the audit of a Shareholder's
tax return, which may not be restricted to adjustments to items of ACPT.
The IRS is required to mail a notice at the outset of the administrative
proceeding and at the time of any adjustment to: (i) any Shareholder who has
at least a 1% interest in ACPT's profits, (ii) any Shareholder designated by a
"notice group," and (iii) the "Tax Matters Partner" of ACPT. A notice group is
any group of Shareholders who have an aggregate profits interest in ACPT of at
least 5% and have designated a Shareholder to receive separate notice on
behalf of the group. The Trustee will be ACPT's Tax Matters Partner. As the
Tax Matters Partner, the Trustee will receive notice on behalf of, and will
provide notice to, those Shareholders who have an interest of less than 1% in
ACPT's profits. The Trustee may extend the statutory period of limitations for
assessment of adjustments attributable to "partnership items" and may enter
into a binding settlement with the IRS. The Trustee's settlement will be
binding on a Shareholder unless the Shareholder (i) has at least a 1% interest
in ACPT's profits, (ii) is a member of a notice group, or (iii) notifies the
IRS that the Trustee is not authorized to act on the Shareholder's behalf.
If the IRS and the Trustee fail to settle an audit proceeding, then the
Trustee may choose to litigate the matter. In that event, the Trustee would
select the court in which such litigation would occur (including a court where
prepayment of the taxes is required). A Shareholder would have the right to
participate in such litigation and would be bound by the outcome of the
litigation even if the Shareholder elected not to participate. Because the
Shareholders would be affected by the outcome of any administrative or
judicial proceedings with respect to ACPT, the Trustee will provide the
Shareholders with appropriate notices of federal income tax proceedings with
respect to ACPT. Shareholders who wish to pursue their own contest are free to
do so at their own expense. Each Shareholder should consult with his or her
tax advisor with respect to the impact of these procedures on his or her
particular case.
Penalty for Substantial Understatement; Deduction of Interest.
If there is a "substantial understatement" of his or her tax liability, a
Shareholder may be liable for a penalty equal to 20% of the underpayment of
tax resulting from the substantial understatement. There will be substantial
understatement if the Shareholder fails to report the greater of $5,000
($10,000 for certain
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corporations) or 10% of the tax required to be shown on the return for the
taxable year. In determining whether a Shareholder's tax liability has been
substantially understated, a Shareholder's items of income and loss arising
from ACPT, as well as items of income and loss from other activities, will be
taken into account. For this purpose, the amount of an understatement does not
include any portion of the understatement (i) for which there existed
"substantial authority" for the position of the taxpayer or (ii) for which the
taxpayer "adequately disclosed" the relevant facts on his or her return and
there was a "reasonable basis" for the tax treatment.
ACPT anticipates that its tax returns will be prepared in a manner that will
not result in the imposition of the 20% penalty. However, due to the
complexity involved in applying the tax laws to particular transactions and
the fact that the determination of whether a particular Shareholder's tax
liability is substantially understated is dependent on the Shareholder's
individual circumstances, there can be no assurance that the substantial
understatement penalty could not be imposed on a Shareholder with respect to
items arising from ACPT. Any interest imposed on the tax deficiencies of
individuals is "personal" interest that will be nondeductible.
CERTAIN STATE INCOME TAX AND PUERTO RICO INCOME TAX CONSIDERATIONS
This section discusses certain state income tax and Puerto Rico income tax
considerations applicable to the Distribution, holding and disposition of
Common Shares. The following discussion of taxation is intended only as a
descriptive summary and does not purport to be a complete analysis or listing
of all potential state and Puerto Rico income tax effects. Shareholders may be
subject to Puerto Rico, state or local tax based on their residence or ACPT's
activities. INVESTORS ARE ADVISED TO CONSULT WITH THEIR OWN TAX ADVISORS AS TO
THEIR INDIVIDUAL TAX STATUS WITH RESPECT TO THE COMMON SHARES AND ANY
DISTRIBUTIONS RECEIVED THEREFROM.
CERTAIN STATE TAX CONSIDERATIONS.
ACPT and the Shareholders may be subject to state or local taxation in
various state or local jurisdictions, including those in which ACPT or the
Shareholder transacts business or resides. The state and local tax treatment
of ACPT and the Shareholders may not conform to the federal income tax
consequences discussed above. Consequently, Shareholders should consult their
own tax advisors regarding the effect of state and local tax laws on the
Distribution, and the holding and disposition of Common Shares.
In general, nonresident individuals holding interests in partnerships whose
activities and assets are limited to investments in stocks and similar assets
are not subject to Maryland State income tax merely because investment and
similar decisions are conducted by the partnership from a Maryland location.
If ACPT is found to be "doing business" in Maryland, however, nonresident
Shareholders would be required to pay tax in Maryland on their distributive
shares of ACPT income. Although the tax would be owed by the Shareholder,
Maryland law imposes a tax similar to a withholding tax at the partnership
level to ensure compliance. Any partnership doing business in Maryland
generally is required to pay this "withholding tax" equal to the top marginal
individual tax rate (currently 5%) of each item of net income includable in
the nonresident partners' distributive share of income attributable to
business carried on in Maryland.
If ACPT is treated as having income from Maryland sources a Shareholder may
be required to file a Maryland income tax return. ACPT will advise
Shareholders of the amount, if any, of their share of ACPT's income that is
attributable to Maryland sources.
CERTAIN PUERTO RICO INCOME TAX CONSIDERATIONS.
This summary of Puerto Rico income tax consequences is based on the
provisions of the Puerto Rico Internal Revenue Code of 1994 ("Puerto Rico
Code"), as amended, applicable to taxable years after June 30, 1995, Puerto
Rico Department of the Treasury ("Puerto Rico Treasury") regulations,
published and private rulings and judicial decisions as currently in effect.
These sources are all subject to change and such change
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could be applied retroactively at any time. In addition, it may be some time
before Regulations or other formal guidance is issued under the Puerto Rico
Code. Such Regulations could interpret the relevant law in a manner that is
contrary to this discussion or contrary to the opinion of Puerto Rico Counsel
(defined below) and such interpretation could be applied retroactively.
Insofar as this section of the Proxy Statement/Prospectus describes Puerto
Rico law, it represents the opinion of Fiddler, Gonzalez & Rodriguez, LLP
("Puerto Rico Counsel").
No rulings have been requested from the Puerto Rico Treasury with respect to
the matters discussed in this section. Puerto Rico Counsel has assisted in the
preparation of, and has reviewed, the discussion in this section. Although the
opinion of Puerto Rico Counsel represents Puerto Rico Counsel's best judgment
as to the matters discussed herein, it does not bind the Puerto Rico Treasury
or in any way constitute an assurance that the Puerto Rico income tax
consequences described herein will be followed by the Puerto Rico Treasury.
Puerto Rico Counsel does not purport to be expert in, or generally familiar
with, the laws of any jurisdiction other than the applicable laws of the
Commonwealth of Puerto Rico and, therefore, expresses no opinion as to matters
not governed by such laws.
Puerto Rico Income Tax Classification of ACPT and IGP Group.
IGP Group has been formed as a corporation under the General Corporation Law
of 1995 of the Commonwealth of Puerto Rico. IGP Group intends to file an
election and to qualify for special partnership status under the Puerto Rico
Code. As a special partnership IGP Group would be treated as a partnership for
Puerto Rico income tax purposes. Under current law, a special partnership is
not a taxable entity and incurs no income tax liability. Instead, each partner
is required to take into account in computing such partner's income tax
liability such partner's allocable share of the partnership's income whether
or not the partnership makes a distribution corresponding to such income.
Treatment as a special partnership for Puerto Rico income tax purposes avoids
the "double" income taxation that occurs when a corporation distributes its
profits to its shareholders and minimizes the aggregate Puerto Rico income tax
imposed on IGP Group and its subsidiaries.
If it were determined that IGP Group is taxable as a corporation, however,
the anticipated tax advantages to ACPT and the Shareholders would be
materially and adversely affected. If IGP Group were classified as a
corporation, the profits of IGP would be taxed to IGP Group at the applicable
corporate tax rate. Moreover, distributions to ACPT would be treated as
corporate distributions, taxable at ordinary income tax rates to the extent of
earnings and profits, or as non-taxable returns of capital or distributions
taxable at capital gains rates, depending upon the circumstances of the
distribution.
If IGP Group does not qualify as a special partnership, (i) it would be
classified as a corporation under the Puerto Rico Code, (ii) it would be
taxable on its profits at the applicable corporate rate, and (iii)
distributions to ACPT, to the extent they arise from earnings and profits,
would be taxable to the Shareholders as dividends. Treatment of IGP Group as a
corporation would result in a material reduction in the anticipated cash flow
to Shareholders and would have a significant adverse effect on the value of
the Common Shares.
Puerto Rico Income Taxation of the Distribution.
United States Shareholders
Puerto Rico Counsel understands that IGC is not and will not be engaged in a
trade or business in Puerto Rico for Puerto Rico income tax purposes.
Accordingly, a Shareholder who is (i) either an individual resident of the
United States or a corporation or partnership organized under the laws of a
state of the United States, (ii) not engaged in a trade or business in Puerto
Rico (a "United States Shareholder"), and (iii) not a Puerto Rico Shareholder
will not recognize income upon receipt of Common Shares in the Distribution or
cash in lieu of fractional shares.
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Puerto Rico Shareholders
A Puerto Rico Shareholder is (i) an individual, estate or trust resident of
Puerto Rico, or a corporation or partnership organized under the laws of
Puerto Rico, or (ii) an individual, estate or trust not a resident of Puerto
Rico and engaged in a trade of business in Puerto Rico, or (iii) a corporation
or partnership not organized under the laws of Puerto Rico and engaged in a
trade or business in Puerto Rico. To a Puerto Rico Shareholder the
distribution of Common Shares and cash in lieu of fractional Share interests
will be treated as a taxable distribution for Puerto Rico income tax purposes.
If the value of the Common Shares and cash received in the Distribution is
equal to or less than the current or accumulated earnings and profits of IGC,
the value of the Common Shares and cash received will be treated as a taxable
dividend. If the value of the Common Shares and cash received in the
Distribution exceeds the current or accumulated earnings and profits of IGC, a
portion of the value of the Common Shares and cash received in the
Distribution by a Puerto Rico Shareholder will be treated as a taxable
dividend. The value of the Common Shares and cash received in the Distribution
in excess of the amount treated as a taxable dividend will be treated first as
a return of capital to the extent of the Puerto Rico Shareholder's adjusted
tax basis for Puerto Rico income tax purposes in his or her IGC Units, and
then as gain from the sale or exchange of property.
If IGC's tax basis in ACPT and cash distributed in lieu of Common Share
interests is equal to or less than the current or accumulated earnings and
profits of IGC, then the entire value of the Common Shares and cash received
in the Distribution by a Puerto Rico Shareholder will be treated as a taxable
dividend to the Puerto Rico Shareholder.
Puerto Rico Income Taxation of ACPT.
Under the Puerto Rico Code, ACPT is and will be taxable as a foreign
corporation. As such, it will pay Puerto Rico income tax on certain of its
Puerto Rico source income, including its distributive share of IGP Group's net
taxable income. ACPT may seek rulings from the Treasury to establish that
under the Puerto Rico Code (i) it will be considered not to be engaged in a
Puerto Rico trade or business, (ii) the tax rate at which its distributive
share of IGP Group's net income will be taxed (presumably 29%) and (iii) that
distributions by ACPT to United States Shareholders will not be subject to
income and withholding taxes.
Under the Puerto Rico Code ACPT will not be considered to be engaged in a
Puerto Rico trade or business solely by reason of being a partner in IGP
Group, and, accordingly, (i) the tax rate at which its distributive share of
IGP Group's taxable income will be taxed is twenty-nine percent (29%), and
(ii) the distributions by ACPT to United States Shareholders will not be
subject to income and withholding taxes.
If for purposes of the Puerto Rico Code, ACPT were treated as engaged in a
trade or business in Puerto Rico, then ACPT would be subject to Puerto Rico
income tax (and in certain circumstances a branch profits tax) on its
distributive share of income or loss (subject to certain limitations) of IGP
Group (and any other income derived by ACPT from sources within Puerto Rico or
income which is effectively connected with a trade or business in Puerto Rico)
at the regular graduated tax rates. Under certain circumstances, United States
Shareholders would be subject to income and withholding tax on the
distribution by ACPT of its earnings and profits and the redemption of Common
Shares.
Puerto Rico Income Taxation of IGP Group.
IGP Group intends to qualify as a special partnership under the Puerto Rico
Code. As a special partnership, IGP Group would not be subject to Puerto Rico
income tax. Instead, IGP Group's partners, including ACPT, would be subject to
taxation on their distributive share of IGP Group's taxable income or loss. To
maintain its status as a special partnership under the Puerto Rico Code, IGP
Group must derive 70% or more of its gross income from Puerto Rico sources and
70% or more of its gross income must be derived from the sale and/or lease of
buildings and structures to third parties and land development, among other
activities.
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Puerto Rico Counsel's Opinions of Puerto Rico Taxation of ACPT and IGP Group.
Puerto Rico Counsel is of the opinion, subject to the following assumptions
and representations, that under the Puerto Rico Code, regulations promulgated
thereunder, applicable private and published rulings, and judicial decisions,
that IGP Group will be treated as a special partnership.
This opinion is based on the following assumptions (i) that IGP Group duly
elects to be treated as a special partnership under the Puerto Rico Code; (ii)
that at least 70% of IGP's income is and will continue to be income from the
source and nature set forth in Section 1330(a) as described in the rulings
issued by the Puerto Rico Treasury on November 7, 1988 and December 11, 1996;
(iii) that IGP Group's sole asset and source of income will be its interests
in IGP; (iv) that IGP Group will be operated in accordance with its Articles
of Incorporation, Bylaws, and this Proxy Statement/Prospectus; and (v) that
IGP Group shall take such actions as may be necessary to preserve its status
as a special partnership under Section 1330(a).
The rules governing special partnerships are highly technical and require
ongoing compliance with a variety of tests that depend among other things, on
the nature of future partnership income. Puerto Rico counsel will not monitor
IGP Group's compliance with these requirements. While IGP Group intends to
satisfy these tests, no assurance can be given that IGP Group will qualify as
a special partnership for any particular year, or that the applicable laws and
regulations will not change and adversely affect IGP Group, ACPT and its
shareholders. IGP Group's qualification as a "pass-through" entity for Puerto
Rico tax purposes is based, in part, on private rulings issued by the Puerto
Rico Department of Treasury in connection with IGP. These rulings are not
binding on the Puerto Rico Department of Treasury and there is no guarantee
that their principles will be followed in evaluating IGP Group's situation.
Puerto Rico Counsel does not purport to be expert on, or generally familiar
with, the laws of any jurisdiction other than the applicable laws of the
Commonwealth of Puerto Rico, and, therefore, expresses no opinion as to
matters not governed by such laws.
Certain Puerto Rico Income Tax Consequences to Shareholders.
United States Shareholders
The Puerto Rico Code provides that distributions by a foreign corporation or
partnership (i.e., ACPT) which is not engaged in a trade or business in Puerto
Rico will not constitute income from sources within Puerto Rico. Accordingly,
under the Puerto Rico Code and provided ACPT is not engaged in a trade or
business in Puerto Rico, distributions to United States Shareholders will not
be subject to income and withholding taxes in Puerto Rico.
Any gain recognized by a United States Shareholder upon a sale or other
disposition of a Common Share will not be subject to Puerto Rico income tax
under the Puerto Rico Code if the sale or exchange takes place outside of
Puerto Rico (all rights title and interest must be transferred outside Puerto
Rico, any exchange must take place outside Puerto Rico). Consequently, any
gain realized by a United States Shareholder from a disposition of a Common
Share on AMEX and/or the PSE will not be subject to Puerto Rico income tax
under the Puerto Rico Code.
Puerto Rico Shareholders
Under the Puerto Rico Code, a Puerto Rico Shareholder will be taxed on a
distribution from ACPT to the extent of the current or accumulated earnings
and profits of ACPT. Distributions in excess of current or accumulated
earnings and profits of ACPT will be treated as a return of capital to the
extent of the Puerto Rico Shareholder's adjusted tax basis in his or her
Common Shares, and then as gain from the sale or exchange of property.
Provided that the Common Share is a capital asset in the hands of a
Shareholder, the gain or loss will be a capital gain or loss and a long-term
capital gain or loss if the Common Share is held for more than six months.
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Upon a sale or other disposition of a Common Share, a Puerto Rico
Shareholder generally will recognize gain or loss equal to the difference
between the amount realized and his or her adjusted tax basis in the Common
Share, both computed applying the income tax principles of the Puerto Rico
Code. Provided that the Common Share is a capital asset in the hands of a
Puerto Rico Shareholder, the gain or loss will be a capital gain or loss and a
long-term capital gain or loss if the Common Share is held for more than six
months.
Because ACPT will be treated as if it were a corporation for Puerto Rico
income tax purposes, a Puerto Rico Shareholder's tax basis in his or her
Common Shares will not be adjusted as a result of income or loss recognized by
ACPT.
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
The following summary of the terms of the shares of beneficial interest of
ACPT does not purport to be complete and is subject to and qualified in its
entirety by reference to the Declaration of Trust and Bylaws of ACPT, copies
of which are exhibits to the Registration Statement of which this Prospectus
is a part. See "Additional Information."
GENERAL.
The Declaration of Trust of ACPT provides that ACPT may issue up to
10,000,000 Common Shares and 10,000,000 Preferred Shares of beneficial
interest, $0.01 par value per share. Upon completion of the Restructuring,
5,250,000 Common Shares will be issued and outstanding. Assuming completion of
the Private Offering, Preferred Shares also will be issued and outstanding
following the Restructuring. As permitted by the Maryland Trust Law, the
Declaration of Trust contains a provision permitting the Board of Trustees,
without any action by the Shareholders, to amend the Declaration of Trust to
increase or decrease the aggregate number of shares of beneficial interest or
the number of shares of any class of shares of beneficial interest that ACPT
has authority to issue. ACPT believes that the power of the Board of Trustees
to issue additional shares of beneficial interest will provide ACPT with
increased flexibility in structuring possible future financings and
acquisitions and in meeting other needs that might arise.
Although the Board of Trustees currently does not intend to do so, the
Declaration of Trust permits it, without the consent of the Shareholders, to
authorize ACPT to issue a class or series that could, depending on the terms
of such class or series, delay, defer or prevent a transaction or a change in
control of ACPT that might involve a premium price for the Common Shares and
might otherwise be in the best interests of the shareholders.
Both the Maryland Trust Law and ACPT's Declaration of Trust provide that no
Shareholder of ACPT will be personally liable for any obligation of ACPT
solely as a result of his status as a Shareholder of ACPT. ACPT's Bylaws
further provide that ACPT shall indemnify each Shareholder against any claim
or liability to which the Shareholder may become subject by reason of his
being or having been a Shareholder or former Shareholder and that ACPT shall
pay or reimburse each Shareholder or former Shareholder for all legal and
other expenses reasonably incurred in connection with any claim or liability.
COMMON SHARES.
All Common Shares offered hereby will be duly authorized, fully paid and
nonassessable. Holders of Common Shares are entitled to receive dividends on
Common Shares if, as and when authorized and declared by the Board of Trustees
of ACPT out of assets legally available therefor. Subject to the preferential
rights of any other class or series of shares of beneficial interest, holders
of Common Shares are entitled to share ratably in the assets of ACPT legally
available for distribution to its Shareholders in the event of its
liquidation, dissolution or winding-up after payment of, or adequate provision
for, all known debts and liabilities of ACPT.
Each outstanding Common Share entitles the holder to one vote on all matters
submitted generally to a vote of Shareholders, including the election of
Trustees. Except as may be provided by the Board of Trustees with
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respect to any other class or series of shares of beneficial interest, the
holders of such Common Shares possess the exclusive voting power. There is no
cumulative voting in the election of Trustees, which means that the holders of
a majority of the outstanding Common Shares can elect all of the Trustees then
standing for election and the holders of the remaining Common Shares will not
be able to elect any Trustees.
Holders of Common Shares have no preference, conversion, sinking fund,
redemption or appraisal rights and have no preemptive rights to subscribe for
any securities of ACPT. All Common Shares have equal dividend, distribution,
liquidation and other rights.
To ensure that American Rental will not fail to qualify as a REIT under the
Code, the Declaration of Trust also authorizes the Trustees to take such
actions as are necessary and desirable to preserve American Rental's REIT
qualification and to limit any person (other than certain current IGC
Unitholders) to direct or indirect ownership of no more than 2% of the
outstanding Common Shares.
PREFERRED SHARES.
The Declaration of Trust authorizes the Board of Trustees to classify any
unissued Preferred Shares and to reclassify any previously classified but
unissued Preferred Shares of any series from time to time in one or more
series. Prior to issuance of shares of each series, the Board of Trustees is
required to set for each such series the terms, the preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends or
other distributions, qualifications and terms or conditions of redemption for
each such series. ACPT currently plans to issue Preferred Shares in the
Private Offering. See "The Restructuring--The Preferred Offering."
TRANSFER AGENT.
The transfer agent and registrar for ACPT's Common Shares and Preferred
Shares is Registrar and Transfer Company.
CERTAIN PROVISIONS OF MARYLAND LAW AND
OF ACPT'S DECLARATION OF TRUST AND BYLAWS
The following summary of certain provisions of Maryland laws applicable to
ACPT and of the Declaration of Trust and Bylaws of ACPT is subject to and
qualified in its entirety by reference to such laws and to the Declaration of
Trust and Bylaws of ACPT.
CLASSIFICATION OF THE BOARD OF TRUSTEES.
The Declaration of Trust and Bylaws provide that the number of Trustees of
ACPT may be established by the Board of Trustees but may not be fewer than
three nor more than nine. At the completion of the Restructuring, it is
expected there will be seven Trustees. The Board of Trustees may increase or
decrease the number of Trustees by a vote of at least two-thirds of the
members of the Board of Trustees, provided that the number of Trustees shall
never be less than the number required by law and the Declaration of Trust and
that the tenure of office of a Trustee shall not be affected by any decrease
in the number of Trustees. Any vacancy on the Board of Trustees, including a
vacancy created by an increase in the number of Trustees (but excluding a
vacancy caused by removal of a Trustee by Shareholders), will be filled by
vote of a majority of the remaining Trustees.
Pursuant to the Declaration of Trust, the Board of Trustees is divided into
three classes of Trustees. The initial terms of the first, second and third
class will expire in 1999, 2000 and 2001, respectively. At each succeeding
Annual Meeting of Shareholders beginning in 1999, Shareholders will elect, by
a plurality of all votes entitled to be cast, Trustees for a term of three
years to succeed the Trustees whose terms are expiring. ACPT believes that
classification of the Board of Trustees will help to assure the continuity and
stability of ACPT's business strategies and policies. Holders of Common Shares
will have no right to cumulative voting in the election of Trustees.
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The classified board provisions could have the effect of making the
replacement of incumbent trustees more time consuming and difficult. At least
two Annual Meetings of Shareholders, instead of one, will generally be
required to effect a change in a majority of the Board of Trustees. The
staggered terms of Trustees may reduce the possibility of a tender offer or an
attempt to change control of ACPT or other transaction that might involve a
premium price for holders of Common Shares, even though a tender offer, change
of control or other transaction might be in the best interest of the
Shareholders.
INDEPENDENT TRUSTEES.
ACPT's Declaration of Trust requires that no fewer than two of the members
of the Board of Trustees must not be employees of ACPT or any affiliated
company or a member of the Wilson Family.
REMOVAL OF TRUSTEES.
The Declaration of Trust provides that a Trustee may be removed for cause
upon the affirmative vote of a majority, and for any reason upon the
affirmative vote of two-thirds, of the votes entitled to be cast in the
election of Trustees. Any vacancy created by removal of a Trustee will be
filled by vote of the Shareholders.
REQUIRED MINIMUM DISTRIBUTIONS.
Under the Declaration of Trust, ACPT is required to make minimum annual
distributions to Shareholders such that the minimum aggregate amount of all
distributions made each year will equal 45% of the net taxable income
allocated to Shareholders in such year, provided that the amount of the
required minimum distribution will be reduced by the amount of taxes paid by
ACPT in Puerto Rico and other foreign countries and certain federal taxes paid
by American Rental with respect to undistributed capital gains. The minimum
distribution may consist of cash dividends and/or distributions of other
property.
SUPERMAJORITY VOTING.
Generally, a majority of the votes entitled to be cast by Shareholders is
necessary to approve matters submitted to a vote of Shareholders other than
the election of Trustees, which requires a plurality vote. However, ACPT's
Declaration of Trust provides that a vote of two-thirds of all the Shareholder
votes entitled to be cast on the matter is required to approve the following
matters: (a) the revocation of ACPT's election to be taxed as a partnership;
(b) the removal of Trustees other than for cause; (c) the amendment of the
Declaration of Trust; and (d) the dissolution of ACPT. As permitted by the
Maryland Trust Law, the Declaration of Trust contains a provision permitting
the Board of Trustees, without any action by the Shareholders, to amend the
Declaration of Trust to increase or decrease the aggregate number of shares of
beneficial interest or the number of shares of any class of shares of
beneficial interest that ACPT has authority to issue.
BUSINESS COMBINATIONS.
The provisions of the Maryland General Corporation Law (the "MGCL")
governing certain types of business combinations (including a merger,
consolidation, share exchange or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) (a "Business
Combination"), which also apply to real estate investment trusts formed under
the Maryland Trust Law such as ACPT, prohibits certain Business Combinations
between a Maryland investment trust and either (i) any person who beneficially
owns, directly or indirectly, ten percent or more of the voting power of the
trust's shares or is an affiliate of the trust who beneficially owned ten
percent or more of the voting power of the outstanding trust shares within the
two-year period prior to the date in question (an "Interested Shareholder") or
(ii) an affiliate of such an Interested Shareholder for five years after the
most recent date on which the Interested Shareholder became an Interested
Shareholder. Any Business Combination thereafter must be recommended by the
board of trustees of such trust, and approved by the affirmative vote of at
least (a) 80% of the votes entitled to be cast by outstanding voting shares of
the trust and (b) two-thirds of the voting shares entitled to be cast by
holders of voting shares of the
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trust other than shares held by the Interested Shareholder or an affiliate of
an Interested Shareholder, who will be a party to the Business Combination.
Such recommendation and approval is not necessary where the trust's common
shareholders receive a minimum price per share (as defined in the MGCL) for
their trust shares and the consideration is received in cash or in the same
form as previously paid by the Interested Shareholder for its shares. These
provisions of the MGCL do not apply, moreover, to Business Combinations that
are approved or exempted by a trust's board of trustees prior to the time that
the Interested Shareholder becomes an Interested Shareholder. The Business
Combination statute permits an investment trust to elect not to be governed by
its provisions. However, ACPT's Board of Trustees does not intend to elect not
to be governed by the Business Combination provisions of the MGCL.
CONTROL SHARE ACQUISITIONS.
The provisions of the MGCL which govern certain acquisitions of Control
Shares (as defined below), which also apply to real estate investment trusts
formed under the Maryland Trust Law such as ACPT, provides that Control Shares
of a Maryland investment trust acquired in a Control Share Acquisition (as
defined below) have no voting rights except to the extent approved by the
affirmative vote of two-thirds of the shares entitled to vote on the matter,
excluding shares of beneficial interest owned by the acquiror, or by officers
or trustees employed by the trust. "Control Shares" are defined by the MGCL as
voting shares of beneficial interest (which, in the case of ACPT would include
Common Shares) that, if aggregated with all other such shares of beneficial
interest previously acquired by the acquiror or in respect of which the
acquiror is able to exercise or direct the exercise of voting power (except
solely by virtue of a revocable proxy), would entitle the acquiror to exercise
voting power in electing trustees within one of the following ranges of voting
power: (i) one-fifth or more but less than one-third of all voting power, (ii)
one-third or more but less than a majority of all voting power, or (iii) a
majority or more of all voting power. Control Shares include shares of the
trust only to the extent that the acquiror is entitled to exercise or direct
the exercise of voting power. A "Control Share Acquisition" is defined by the
MGCL as the acquisition of Control Shares, subject to certain exceptions.
A person who has made or proposes to make a Control Share Acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the Board of Trustees of the trust to call a special meeting of
shareholders to be held within 50 days of the demand to consider the voting
rights of the shares. If no request for a meeting is made, the trust may
itself present the question for consideration at any shareholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by statute, then
the trust may redeem any or all of the Control Shares (except those for which
voting rights, at its option, previously have been approved) for fair value
determined as of the date of the last Control Share Acquisition by the
acquiror or of a special shareholder meeting held to consider the voting
rights to be accorded such shares, without regard to the absence of voting
rights for the Control Shares. If voting rights for Control Shares are
approved at a shareholders meeting and the acquiror becomes entitled to vote a
majority of the shares entitled to vote, all other shareholders may exercise
appraisal rights. The fair value of the shares as determined for purposes of
such appraisal rights may not be less than the highest price per share paid by
the acquiror in the Control Share Acquisition.
The Control Share statute does not apply (a) to shares acquired in a merger,
consolidation or share exchange if the trust is a party to the transaction or
(b) to acquisitions approved or exempted by the Declaration of Trust or Bylaws
of the trust.
The Control Share statute permits an investment trust to elect not to be
governed by its provisions. However, ACPT's Board of Trustees does not intend
to elect not be governed by the Control Share provisions of the MGCL. In
addition, the restriction on ownership of Common Shares set forth in ACPT's
Declaration of Trust also would restrict the ability of any person to engage
in a Control Share Acquisition with respect to the Common Shares.
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AMENDMENT OF DECLARATION OF TRUST AND BYLAWS.
The Declaration of Trust may only be amended upon the affirmative vote of
two-thirds of all of the votes entitled to be cast on any such proposed
amendment. In addition, the Declaration of Trust may be amended by the Board
of Trustees, without Shareholder approval, to conform the Declaration of Trust
to the Maryland Trust Law. ACPT's Bylaws may be amended or altered exclusively
by the Board of Trustees.
LIMITATION OF LIABILITY AND INDEMNIFICATION.
The Maryland Trust Law permits a Maryland investment trust to include in its
declaration of trust a provision limiting the liability of its trustees and
officers to the trust and its shareholders for money damages except where (a)
it is proved that the person actually received an improper benefit or profit
in money, property or services, or (b) a judgment or other final adjudication
adverse to the person is entered in a proceeding based on a finding material
to the cause of action that the person engaged in active and deliberate
dishonesty. The Declaration of Trust of ACPT contains such a provision that
limits liability to the maximum extent permitted by Maryland law.
The Declaration of Trust and Bylaws of ACPT also obligate it, to the maximum
extent permitted under Maryland law, to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (a) any
present or former Trustee or officer who is made a party to the proceeding by
reason of his service in that capacity and (b) any individual who, while a
Trustee of ACPT and at the request of ACPT, serves or has served another
investment trust corporation, partnership, joint venture, trust, employee
benefit plan or any other enterprise as a trustee, director, officer or
partner and who is made party to the proceeding by reason of his service in
that capacity, against any claim or liability to which he may become subject
by reason of such status. The Declaration of Trust and Bylaws also permit ACPT
to indemnify and advance expenses to any person who served a predecessor of
ACPT in any of the capacities described above and to any employee or agent of
ACPT or a predecessor of ACPT. The Bylaws require ACPT to indemnify each
Trustee or officer who has been successful, on the merits or otherwise, in the
defense of any proceeding to which he is made a party by reason of his service
in that capacity.
The Bylaws of ACPT require it, as a condition to advancing expenses, to
obtain (a) a written affirmation by the Trustee or officer of his good faith
belief that he has met the standard of conduct necessary for indemnification
by ACPT as authorized by the Bylaws and (b) a written statement by or on his
behalf to repay the amount paid or reimbursed by ACPT if it shall ultimately
be determined that the standard of conduct was not met.
The Maryland Trust Law permits a Maryland investment trust to indemnify and
advance expenses to its trustees, officers, employees and agents to the same
extent as permitted under the MGCL for directors and officers of Maryland
corporations. The MGCL authorizes a corporation to indemnify its present and
former directors and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service unless it is established that (a) the act or omission was
material to the matter giving rise to the proceeding and (i) was committed in
bad faith or (ii) was the result of active and deliberate dishonesty, (b) the
director or officer actually received an improper personal benefit in money,
property or services or (c) the director or officer in the case of any
criminal proceeding had reasonable cause to believe that the act or omission
was unlawful. A Maryland corporation, however, may not indemnify a director or
officer for an adverse judgment in a suit brought by or on behalf of the
corporation.
DISSOLUTION OF ACPT.
Pursuant to ACPT's Declaration of Trust, ACPT may be dissolved upon the
affirmative vote of two-thirds of all of the votes entitled to be cast on such
matter.
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POSSIBLE ANTITAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE
DECLARATION OF TRUST AND BYLAWS.
The Control Share and Business Combination provisions of the MGCL and the
provisions of ACPT's Declaration of Trust relating to classification of the
Board of Trustees, the removal of Trustees, restrictions on ownership of
Common Shares, and the ability of the Board of Trustees to prescribe the terms
of and issue Preferred Shares could have the affect of delaying, deferring or
preventing a transaction or a change in control of ACPT that might involve a
premium price for holders of Common Shares or otherwise be in their best
interest.
MARYLAND ASSET REQUIREMENTS.
The Maryland Trust Law pursuant to which ACPT was formed requires at least
75% of the value of ACPT's assets to be held, directly or indirectly, in real
estate assets, mortgages or mortgage related securities, government
securities, cash and cash equivalent items, including high-grade short term
securities and receivables. The Maryland Trust Law also prohibits ACPT from
using or applying land for farming, agricultural, horticultural or similar
purposes.
COMPARATIVE RIGHTS OF IGC UNITHOLDERS AND SHAREHOLDERS
GENERAL.
IGC is a limited partnership formed under the Delaware Act and ACPT is
organized as a real estate investment trust under the Maryland Trust Law that
will be taxable as a partnership. The discussion of the comparative rights of
IGC Unitholders and Shareholders of ACPT set forth below does not purport to
be complete and is subject to and qualified in its entirety by reference to
the Maryland Trust Law, the Delaware Act, the Partnership Agreement of IGC and
the Declaration of Trust and Bylaws of ACPT. Copies of these documents have
been filed as exhibits to the Registration Statement of which this Proxy
Statement/Prospectus is a part.
MANAGEMENT.
The Partnership Agreement of IGC provides that, with certain limited
exceptions, the Managing General Partner of IGC (which currently is IGMC) has
exclusive discretion to manage and control the business and affairs of IGC.
The Managing General Partner may be removed upon the affirmative vote of more
than fifty percent of the IGC Unitholders. The IGC Unitholders do not have any
right to elect the directors of the Managing General Partner.
The Declaration of Trust of ACPT provides that the management and control of
the business and affairs of ACPT are vested in its Board of Trustees which is
elected by the Shareholders. The Declaration of Trust of ACPT provides for a
classified Board consisting of three classes as nearly equal in number as
possible. At each Annual Meeting of Shareholders, one class of Trustees will
be elected for a term of three years. Trustees may be removed for cause upon a
majority vote, and for any reason by a two-thirds vote, of the Shares entitled
to vote in the election of Trustees. Vacancies created by removal will be
filled by Shareholder vote. Any other vacancy will be filled by a majority of
the Board of Trustees remaining in office.
REQUIRED MINIMUM DISTRIBUTIONS.
Under the Partnership Agreement, IGC generally is required to make annual
distributions in cash or property to IGC Unitholders equal to 55% of the net
taxable income (as defined in the Partnership Agreement) allocated to such IGC
Unitholders for such year.
Under the Declaration of Trust, ACPT is required to make minimum annual
distributions to Shareholders such that the minimum aggregate amount of all
distributions made each year will equal 45% of the net taxable income
allocated to Shareholders in such year, provided that the amount of the
required minimum distribution
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will be reduced by the amount of taxes paid by ACPT in Puerto Rico and other
foreign countries and certain federal taxes paid by American Rental with
respect to undistributed capital gains. The minimum distribution may consist
of cash dividends and/or distributions of other property.
VOTING RIGHTS.
Under the Partnership Agreement of IGC, IGC Unitholder approval by majority
vote is required for (i) sale of all or substantially all of the assets of
IGC, (ii) merger or consolidation, and (iii) certain amendments to the
Partnership Agreement, including issuances of additional limited partnership
interests. The Managing General Partner has the exclusive authority to issue
IGC Units without limitation as to amount.
In addition, certain actions including actions that would cause loss of
limited liability, treatment of IGC as a corporation for tax purposes, or,
except in the case of merger or dissolution, delisting of IGC Units from any
national securities exchange require a unanimous vote of IGC Unitholders.
Under the Declaration of Trust of ACPT, Shareholders have voting rights with
respect to (i) termination of partnership tax status, (ii) the election and
removal of Trustees, (iii) amendments of the Declaration of Trust, (iv) the
merger or consolidation of ACPT or the sale of substantially all of ACPT's
assets; and (v) the dissolution of ACPT, and (vi) such other matters with
respect to which the Board of Trustees may deem to require a Shareholder vote.
Each Common Share entitles its holder to cast one vote on all matters
presented generally to the Shareholders.
MEETINGS.
The Partnership Agreement of IGC does not provide for annual meetings of the
IGC Unitholders.
The Declaration of Trust of ACPT and the Maryland Trust Law require that an
Annual Meeting of Shareholders be duly held. The Bylaws of ACPT also provide
for the calling of special meetings under certain circumstances.
AMENDMENT OF DECLARATION OF TRUST, BYLAWS AND PARTNERSHIP AGREEMENT.
Under the Partnership Agreement, holders of IGC Units representing at least
10% of the outstanding limited partnership interests may propose amendments to
the Partnership Agreement. Any proposed amendments require a majority vote,
except for amendments which (i) would adversely affect in any material aspect
the rights of the IGC Unitholders to exercise any right granted to the
Assignor Limited Partner by the Delaware Act (such as the right to maintain a
derivative action, the right to exercise voting power, and the right to
inspect and photocopy IGC's books and records) and assigned to the IGC
Unitholders, (ii) would result in the loss of limited liability of the Limited
Partners or IGC Unitholders, (iii) would cause IGC to be treated as an
"association" taxable as a corporation for purposes of federal income
taxation, or (iv) would result in the delisting of the IGC Units by any
securities exchange on which the IGC Units are traded; all of which require
unanimous approval. In addition, any amendment that would reduce the minimum
cash distributions that IGC is required to make must be approved by a two-
thirds vote of IGC Unitholders.
The Declaration of Trust of ACPT may only be amended by the affirmative vote
of two-thirds of the outstanding Common Shares. The Bylaws of ACPT may be
amended exclusively by majority vote of the Board of Trustees.
LIMITED LIABILITY.
Under the Partnership Agreement, unless an IGC Unitholder participates in
the control of the business or in certain other limited circumstances, it will
not be responsible for the liabilities of IGC.
147
<PAGE>
Both the Maryland Trust Law and ACPT's Declaration of Trust provide that no
Shareholder of ACPT will be personally liable for any obligation of ACPT
solely as a result of his status as a Shareholder of ACPT.
DISSOLUTION OF THE PARTNERSHIP AND ACPT.
Under the Partnership Agreement, dissolution of IGC requires the consent of
a majority of the IGC Unitholders.
Under the terms of the Declaration of Trust of ACPT, the Shareholders may
compel the dissolution of ACPT by the affirmative vote of two-thirds of the
votes entitled to be cast.
LIQUIDATION RIGHTS.
Under the Partnership Agreement, IGC Unitholders share ratably in accordance
with their percentage interests in any assets remaining after satisfaction of
obligations to creditors and any liquidation preferences of preferred units.
In the event of liquidation of ACPT, the holders of Common Shares would be
entitled to share ratably in any assets remaining after satisfaction of
obligations to creditors and any liquidation preferences on any series of
Preferred Shares that may then be outstanding.
LIMITATIONS OF LIABILITY OF GENERAL PARTNERS AND TRUSTEES.
The Partnership Agreement of IGC sets certain limits on the liability of the
General Partners and their affiliates to IGC and the IGC Unitholders.
The Declaration of Trust of ACPT provides that Trustees shall not be liable
to ACPT or the Shareholders for losses sustained or liabilities incurred as a
result of any acts or omissions of the Board of Trustees if the conduct of the
applicable person did not constitute active and deliberate dishonesty as
adjudicated by a court of competent jurisdiction, or if the Trustee actually
received an improper benefit or profit in money, property or services.
INDEMNIFICATION.
The Partnership Agreement of IGC indemnifies the General Partners and their
affiliates under certain circumstances.
The Declaration of Trust and Bylaws of ACPT provides that ACPT will
indemnify present and former Trustees and officers to the maximum extent
permitted by Maryland law.
OWNERSHIP LIMITATIONS.
There is no limitation on the number of IGC Units that any Unitholder may
own. In order to maintain the REIT status of American Rental, no Shareholder
(except certain existing IGC Unitholders) may own more than 2% of the
outstanding Common Shares.
LEGAL MATTERS
The validity of the issuance of the Common Shares being offered hereby will
be passed upon for ACPT by Covington & Burling. The federal income tax
consequences in connection with the Restructuring will be passed upon for ACPT
by Covington & Burling and the Puerto Rico income tax consequences in
connection with the Restructuring will be passed upon for ACPT by Fiddler,
Gonzalez & Rodriguez LLP.
148
<PAGE>
EXPERTS
The combined historical statements of assets and liabilities of ACPP as of
December 31, 1997 and 1996, the related combined historical statements of
operations and cash flows for each of the three years in the period ended
December 31, 1997, included in this Proxy Statement/Prospectus and elsewhere
in the Registration Statement, and the financial statements of IGC
incorporated by reference in this Proxy Statement/Prospectus and elsewhere in
the Registration Statement, have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the reports of said firm and
upon the authority of said firm as experts in accounting and auditing in
giving said reports.
REPORTS TO SHAREHOLDERS
ACPT will furnish to each Shareholder of record, within 90 days of the close
of each fiscal year, an annual report containing information substantially as
submitted by ACPT to the SEC on its annual report on Form 10-K, including a
report of the activities of ACPT and a statement showing any cash from
operations or proceeds of capital transactions distributed or to be
distributed in respect of such fiscal year. Such annual report also will
contain certain financial statements of ACPT for such fiscal year, including a
balance sheet and statements of income, and changes in financial position,
each of which will be audited by a nationally recognized firm of independent
public accountants. In addition, within 45 days after the end of each fiscal
quarter (except the fourth quarter), ACPT will furnish to each Shareholder of
record a quarterly report containing information substantially as submitted by
ACPT to the SEC on its quarterly report on Form 10-Q, including an unaudited
balance sheet and statements of income and changes in financial position. Each
such annual and quarterly report also will include a statement setting forth
(i) any transactions between IGC and ACPT, or any affiliate of either of them;
(ii) the amount of any fees, commissions, compensation and other remuneration
paid or accrued to ACPT; and (iii) a description of any services rendered to
IGC by ACPT, or any affiliate of either of them. The financial information
contained in all such reports will be prepared on the accrual basis of
accounting in accordance with generally accepted accounting principles and,
where appropriate, will include a reconciliation to information furnished to
Shareholders for tax purposes.
Within 75 days after the close of each taxable year, ACPT will furnish to
each Shareholder of record information required for federal and state income
tax reporting purposes. Such information will be furnished in summary form so
that certain complex calculations normally required of partners can be
avoided. ACPT's ability to furnish such summary information may depend on the
cooperation of Shareholders in supplying certain information to ACPT.
149
<PAGE>
GLOSSARY
The meanings of certain capitalized and specialized terms used in this
Prospectus are set forth below. Terms defined in the singular form shall
similarly refer to the plural and vice versa.
"1997 Act" means the Taxpayer Relief Act of 1997.
"ACM" means asbestos-containing materials.
"ACPP" means American Community Portfolio Properties, which, for purposes of
the audited combined historical financial statements included herein, refers
to the assets, liabilities and operations that will be transferred to ACPT in
the Restructuring.
"ACPT" means American Community Properties Trust, a Maryland real estate
investment trust formed under the Maryland Trust Law.
"ACPT Average" means the average closing price of ACPT Common Shares on the
AMEX for the 20 trading days immediately following, but not including, the
Distribution Date.
"ACPT Options" means options to purchase an ACPT Common Shares under the
Share Incentive Plan.
"ADA" means the Americans with Disabilities Act of 1990.
"Affiliate Shareholder" means any holder of more than 2% of the Common
Shares of ACPT.
"AFH" means American Family Homes, LLC, a Delaware limited liability
company.
"American Housing" means American Housing Properties, L.P., a Delaware
limited partnership.
"American Land" means American Land Development US, Inc., a Maryland
corporation.
"American Management" means American Rental Management Company, a Delaware
corporation and the property manager for the properties owned by American
Rental.
"American Rental" means American Rental Properties Trust, a Maryland real
estate investment trust.
"AMEX" means the American Stock Exchange.
"Appeals Court" means the U.S. Court of Appeals for the Fourth Circuit.
"Asset Transfers" means the transfers of IGC's principal real estate
operations and assets to ACPT.
"Banc One" means Banc One Capital Partners IV, Ltd.
"Brick House" means Brick House Realty, Inc.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Common Shares" means the common shares of beneficial interest of ACPT.
"Consulting Agreement" means the consulting agreement by and between
American Management and James J. Wilson.
"County" means Charles County, Maryland.
150
<PAGE>
"County Commissioners" means the County Commissioners of Charles County,
Maryland.
"CWT" means Caribe Waste Technologies, Inc.
"CWT Trust" means the trust holding the common stock of IWT and CWT for the
benefit of IGC Unitholders.
"Delaware Act" means the Delaware Revised Uniform Limited Partnership Act.
"Distribution" means the distribution of all of the Common Shares of ACPT to
the partners of IGC including the IGC Unitholders.
"Distribution Agent" means Registrar and Transfer Company.
"Distribution Date" means the date on which ACPT will issue to IGC
sufficient Common Shares of ACPT to enable IGC to make the Distribution.
"District Court" means the U.S. District Court for the District of Maryland.
"EDGAR" means the Commission's Electronic Data Gathering and Retrieval
program.
"EMC" means Equus Management Company.
"Employment Agreements" means the employment agreements by and between
American Management and each of Edwin Kelly, Francisco Arrivi, and Paul
Resnick.
"Equus" means Equus Gaming Company L.P., a Virginia limited partnership.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and the rules and regulations thereunder.
"Escorial Builders" means Escorial Builders Associates S.E., a Puerto Rico
partnership principally engaged in the construction of condominiums.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder.
"FHA" means the Federal Housing Administration.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980.
"Gatewood" means the Gatewood Company, Inc.
"Hooper" means James B. Hooper, P.A.
"HUD" means the United States Department of Housing and Urban Development.
"IBC" means Interstate Business Corporation, a Delaware corporation and a
general partner of IGC.
"IGC" means Interstate General Company, L.P., a Delaware limited
partnership.
"IGC Average" means the average closing sale price of IGC Units on the
principal exchange on which they are traded, or, if not traded on an exchange,
in the over-the-counter-market, for the 20 trading days immediately following,
but not including, the Distribution Date.
"IGC Options" means options to purchase ACPT Common Shares under the Trustee
Share Plan.
151
<PAGE>
"IGC Unit" means a Class A unit of beneficial interest in IGC.
"IGC Unitholder" means a holder of IGC Units.
"IGMC" means Interstate General Management Corporation, a Delaware
corporation and the managing general partner of IGC.
"IGP" means Interstate General Properties Limited Partnership, S.E., a
Maryland limited partnership.
"IGP Group" means IGP Group Corp.
"Independent Trustees" means members of the Board of Trustees of ACPT who
are not employees of ACPT or any affiliated company or members of the Wilson
Family.
"IRS" means the Internal Revenue Service.
"IWT" means Interstate Waste Technologies, Inc., a Delaware corporation.
"LDA" means Land Development Associates S.E., a Puerto Rico partnership.
"LDA Note" means the $6.77 million note payable by LDA in favor of IGC.
"LIHPRHA" means the Low Income Housing Preservation and Resident
Homeownership Act of 1990.
"Majority Vote" means the vote or consent of the holders of IGC Units
representing a majority of all issued and outstanding IGC Units entitled to
vote.
"Management" means the management of IGC.
"Maryland Cable" means Maryland Cable Limited Partnership.
"Maryland Trust Law" means Article 8 of the Maryland Corporations and
Associations Law.
"McClosky Associates" means Robert F. McClosky Associates.
"MGCL" means Maryland General Corporation Law.
"NBV" means the NBValuation Group, Inc.
"Ownership Limit" shall mean 2% of the outstanding Common Shares of ACPT.
"Parque Escorial" means the planned community of Parque Escorial located
approximately six miles from the central business district in San Juan, Puerto
Rico.
"Plan" means a pension, profit-sharing, employee benefit, or retirement
plan, or individual retirement account under ERISA.
"Plan Asset Regulations" means regulations of the Department of Labor that
define the assets of a Plan under ERISA.
"Planning Commission" means the Charles County Planning Commission.
"Preferred Shares" means preferred shares of beneficial interest in ACPT.
"Private Offering" shall have the meaning set forth on page 45 of the
document.
152
<PAGE>
"PUD" means planned unit development.
"Puerto Rico Apartment Partnerships" means the 9 Puerto Rico apartment
partnerships in which IGP holds partnership interests.
"Puerto Rico Code" means the Puerto Rico Internal Revenue Code of 1994.
"Puerto Rico Counsel" means the law firm of Fiddler, Gonzalez & Rodriguez,
LLP.
"Record Date" means August 10, 1998.
"Registration Statement" means the Form S-4 Registration Statement filed by
ACPT with the Commission.
"Regulations" means Regulations of the Treasury Department interpreting the
Code.
"REIT" means a real estate investment trust within the meaning of Section
856 of the Code.
"Restructuring" means the series of transactions constituting the Asset
Transfers and the Distribution.
"Retained Assets" means the Wetlands Properties, the LDA Note, all of the
shares of AFH, 14 acres of commercial land in St. Charles, 26 single family
home lots in the Dorchester neighborhood, an indirect 50% interest in
Brandywine Investment Associates L.P., which owns land in Brandywine,
Maryland, a 100% interest in Pomfret LLC, which owns land in Pomfret,
Maryland, the Westbury land, fractional interests in Chastleton and Coachman's
L.P., and the beneficial interest in the CWT Trust.
"Retirement Plan" means the IGC retirement savings plan currently in effect.
"SCA" means St. Charles Associates Limited Partnership.
"Securities Act" means the Securities Act of 1933, as amended, and
applicable regulations thereunder.
"Share Incentive Plan" means the 1997 ACPT Share Incentive Plan providing
Common Share-based incentive compensation for ACPT officers and key employees.
"Smail" means Smail Associates, Inc.
"St. Charles" means the planned community in Charles County, Maryland, that
has been under development by IGC and its predecessors since 1968.
"Stanger" means Robert A. Stanger & Co.
"State Finance Agencies" means the FHA, or housing finance agencies in
Puerto Rico, Washington, D.C., Virginia or Maryland.
"Strike Price" means $3.0016 per IGC Unit.
"Trustee Share Plan" means the 1997 ACPT Trustee Share Incentive Plan to
provide Common Share-based incentive compensation for ACPT Trustees.
"U.S. Apartment Partnerships" means the 13 investment apartment properties
in which IGC holds partnership interests that will be transferred to American
Rental under the Restructuring.
"U.S. Attorney" means the U.S. Attorney for the District of Maryland.
153
<PAGE>
"Wetlands" means (following the definition in the U.S. Army Corps of
Engineers regulations) areas saturated by surface or ground water sufficient
to support vegetation typically adapted for life in saturated soil conditions.
Wetlands generally include swamps, marshes, bogs and similar areas.
"Wetlands Properties" means those IGC properties that are the subject of
litigation with the federal government concerning violations of the Clean
Water Act.
"Whitman Requardt" means Whitman Requardt Associates LLP.
"Wilson Family" means collectively J. Michael Wilson; Thomas B. Wilson;
Kevin Wilson; Elizabeth Weber; Mary Pat Wilson; Brian Wilson; James J. Wilson;
Barbara A. Wilson; Interstate Business Corporation; Wilson Securities
Corporation; and Wilson Family Limited Partnership.
154
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Owners of American Community Portfolio Properties:
We have audited the accompanying combined historical statements of assets
and liabilities (defined in Note 1 and referred to as "American Community
Portfolio Properties") to be transferred by Interstate General Company L.P.
and subsidiaries to American Community Properties Trust (a newly formed
investment trust that intends to be taxed as a partnership) and subsidiaries
as of December 31, 1997 and 1996, and the related combined historical
statements of operations and cash flows for each of the three years in the
period ended December 31, 1997. These combined historical financial statements
are the responsibility of the management of American Community Portfolio
Properties. Our responsibility is to express an opinion on these combined
historical financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
The accompanying combined historical financial statements were prepared for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission (for inclusion in the registration statement on Form S-4
of American Community Properties Trust), as described in Note 1, and are not
intended to be a complete presentation of the financial position, results of
operations or cash flows of Interstate General Company L.P. and affiliated
entities or American Community Properties Trust.
In our opinion, the combined historical financial statements referred to
above present fairly, in all material respects, the financial position of
American Community Portfolio Properties as of December 31, 1997 and 1996, and
the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Washington, D.C.
July 28, 1998
F-1
<PAGE>
AMERICAN COMMUNITY PORTFOLIO PROPERTIES
COMBINED HISTORICAL STATEMENTS OF OPERATIONS OF ASSETS
AND LIABILITIES TO BE TRANSFERRED TO
AMERICAN COMMUNITY PROPERTIES TRUST AND SUBSIDIARIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
---------------- -------------------------
1998 1997 1997 1996 1995
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Community development--land
sales
to non-affiliates............. $ 5,961 $ 1,449 $10,060 $ 3,608 $11,333
to affiliates................. -- 70 3,105 10,066 4,108
Equity in earnings from
partnerships and developer
fees........................... 505 398 1,509 16,585 2,514
Rental property revenues........ 2,209 2,158 8,737 7,577 4,642
Management and other fees,
substantially all from related
entities....................... 976 1,343 3,775 4,816 3,894
Interest and other income....... 137 143 943 982 693
------- ------- ------- ------- -------
Total revenues.............. 9,788 5,561 28,129 43,634 27,184
------- ------- ------- ------- -------
EXPENSES
Cost of land sales.............. 3,608 970 8,494 9,378 7,801
Selling and marketing........... 21 15 127 226 131
General and administrative...... 1,600 1,530 6,607 6,810 6,769
Interest expense................ 910 961 3,820 4,433 4,263
Rental properties operating
expense........................ 896 835 3,597 3,245 1,695
Depreciation and amortization... 471 470 1,850 1,726 841
Write-off of deferred project
costs.......................... -- 5 6 321 --
Spin-off costs.................. 757 -- 1,164 -- --
------- ------- ------- ------- -------
Total expenses.............. 8,263 4,786 25,665 26,139 21,500
------- ------- ------- ------- -------
INCOME BEFORE PROVISION FOR INCOME
TAXES AND MINORITY INTEREST...... 1,525 775 2,464 17,495 5,684
PROVISION FOR INCOME TAXES........ 283 60 470 3,424 1,369
------- ------- ------- ------- -------
INCOME BEFORE MINORITY INTEREST... 1,242 715 1,994 14,071 4,315
MINORITY INTEREST................. (241) (94) (600) (444) (511)
------- ------- ------- ------- -------
INCOME BEFORE EXTRAORDINARY ITEM.. 1,001 621 1,394 13,627 3,804
EXTRAORDINARY ITEM-EARLY
EXTINGUISHMENT OF DEBT........... -- -- -- (932) --
------- ------- ------- ------- -------
NET INCOME........................ $ 1,001 $ 621 $ 1,394 $12,695 $ 3,804
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these combined historical
statements.
F-2
<PAGE>
AMERICAN COMMUNITY PORTFOLIO PROPERTIES
COMBINED HISTORICAL STATEMENTS OF ASSETS
AND LIABILITIES TO BE TRANSFERRED TO
AMERICAN COMMUNITY PROPERTIES TRUST AND SUBSIDIARIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -----------------
1998 1997 1996
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS
Unrestricted................................... $ 2,126 $ 2,127 $ 2,143
Restricted..................................... 2,002 374 895
-------- -------- --------
4,128 2,501 3,038
-------- -------- --------
ASSETS RELATED TO RENTAL PROPERTIES
Operating properties, net of accumulated
depreciation of $21,707, $21,392 and $20,658,
as of March 31, 1998, December 31, 1997 and
1996, respectively............................ 38,174 38,143 39,533
Investment in unconsolidated rental property
partnerships.................................. 7,015 8,657 11,693
Other receivables, net of reserves of $285,
$223 and $52 as of March 31, 1998, December
31, 1997 and 1996, respectively............... 665 621 785
-------- -------- --------
45,854 47,421 52,011
-------- -------- --------
ASSETS RELATED TO COMMUNITY DEVELOPMENT
Land and development costs
Puerto Rico.................................. 32,202 34,268 35,068
St. Charles, Maryland........................ 22,437 21,750 21,043
Other United States locations.................. -- -- 1,636
Notes receivable on lot sales and other,
substantially all due from affiliates......... 3,604 5,629 5,253
-------- -------- --------
58,243 61,647 63,000
-------- -------- --------
ASSETS RELATED TO HOMEBUILDING
Investment in joint venture.................... 853 591 275
-------- -------- --------
OTHER ASSETS
Receivables and other.......................... 1,782 2,514 1,765
Property, plant and equipment, less accumulated
depreciation
of $1,615, $1,675 and $1,770 as of March 31,
1998, December 31, 1997 and 1996,
respectively.................................. 423 448 487
-------- -------- --------
2,205 2,962 2,252
-------- -------- --------
TOTAL ASSETS............................... $111,283 $115,122 $120,576
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined historical
statements.
F-3
<PAGE>
AMERICAN COMMUNITY PORTFOLIO PROPERTIES
COMBINED HISTORICAL STATEMENTS OF ASSETS
AND LIABILITIES TO BE TRANSFERRED TO
AMERICAN COMMUNITY PROPERTIES TRUST AND SUBSIDIARIES--(CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -----------------
1998 1997 1996
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND CAPITAL
LIABILITIES RELATED TO RENTAL PROPERTIES
Recourse debt.................................. $ 918 $ 969 $ 1,139
Non-recourse debt.............................. 38,995 39,101 39,508
Accounts payable and accrued liabilities....... 3,067 2,779 2,217
-------- -------- --------
42,980 42,849 42,864
-------- -------- --------
LIABILITIES RELATED TO COMMUNITY DEVELOPMENT
Recourse debt.................................. 34,128 39,784 38,943
Non-recourse debt.............................. 2,324 2,295 2,153
Accounts payable, accrued liabilities and
deferred income............................... 4,444 5,100 4,678
-------- -------- --------
40,896 47,179 45,774
-------- -------- --------
OTHER LIABILITIES
Accounts payable and accrued liabilities....... 3,467 3,246 2,676
Notes payable and capital leases............... 145 173 157
Accrued income tax liability--current.......... 2,452 1,539 3,976
Accrued income tax liability--deferred......... 3,491 4,120 5,041
-------- -------- --------
9,555 9,078 11,850
-------- -------- --------
TOTAL LIABILITIES.......................... 93,431 99,106 100,488
-------- -------- --------
CAPITAL.......................................... 17,852 16,016 20,088
-------- -------- --------
TOTAL LIABILITIES AND CAPITAL.............. $111,283 $115,122 $120,576
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined historical
statements.
F-4
<PAGE>
AMERICAN COMMUNITY PORTFOLIO PROPERTIES
COMBINED HISTORICAL STATEMENTS OF CASH FLOWS OF ASSETS
AND LIABILITIES TO BE TRANSFERRED TO
AMERICAN COMMUNITY PROPERTIES TRUST AND SUBSIDIARIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
---------------- ---------------------------
1998 1997 1997 1996 1995
------- ------- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income.................... $ 1,001 $ 621 $ 1,394 $ 12,695 $ 3,804
Adjustments to reconcile net
income to net cash provided
by operating activities:
Extraordinary item............ -- -- -- 932 --
Depreciation and
amortization................. 471 470 1,850 1,726 841
(Benefit) provision for
deferred income taxes........ (629) 93 (920) 419 646
Equity in earnings from
unconsolidated partnerships
and developer fees........... (243) (419) (1,417) (16,660) (2,514)
Distributions from
unconsolidated partnerships.. 1,750 331 5,155 15,574 980
Cost of sales-community
development.................. 3,608 970 8,494 9,378 7,801
Equity in (earnings) loss from
homebuilding joint venture... (262) 21 (92) 75 --
Write-off of deferred project
costs........................ -- 5 6 321 --
Changes in notes and accounts
receivable................... 2,422 (860) (186) (3,065) (1,738)
Changes in accounts payable,
accrued liabilities and
deferred income.............. 766 251 (884) 5,059 (358)
------- ------- ------- -------- --------
Net cash provided by
operating activities........ 8,884 1,483 13,400 26,454 9,462
------- ------- ------- -------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Investment in land development
for future sales............. (2,229) (335) (6,764) (10,658) (15,066)
Change in assets related to
unconsolidated rental
property partnerships........ 135 36 (708) (84) 555
Change in restricted cash..... (1,628) (125) 521 1,150 3,588
(Additions to) dispositions of
rental operating properties.. (458) (257) 141 (1,275) 658
Dispositions (acquisitions) of
other assets, net............ 272 534 (1,338) (117) (746)
Contributions to homebuilding
joint venture................ -- (224) (224) (100) (250)
Acquisition of rental property
partnership interests........ -- -- -- -- (170)
------- ------- ------- -------- --------
Net cash used in investing
activities.................. (3,908) (371) (8,372) (11,084) (11,431)
------- ------- ------- -------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Cash (payments on) proceeds
from debt financing, net..... (5,812) (1,509) 422 (10,809) 5,040
Cash distributions to
Unitholders.................. -- -- -- (1,140) --
Cash contributions from
(distributions to) IGC, net.. 835 (742) (5,745) (4,660) (938)
Issuance of warrants.......... -- -- 279 -- --
Exercise of employee IGC Unit
options...................... -- -- -- -- 171
------- ------- ------- -------- --------
Net cash (used in) provided
by financing activities..... (4,977) (2,251) (5,044) (16,609) 4,273
------- ------- ------- -------- --------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS.......... (1) (1,139) (16) (1,239) 2,304
CASH AND CASH EQUIVALENTS
BEGINNING OF PERIOD........... 2,127 2,143 2,143 3,382 1,078
------- ------- ------- -------- --------
CASH AND CASH EQUIVALENTS END
OF PERIOD..................... $ 2,126 $ 1,004 $ 2,127 $ 2,143 $ 3,382
======= ======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these combined historical
statements.
F-5
<PAGE>
AMERICAN COMMUNITY PORTFOLIO PROPERTIES
NOTES TO COMBINED HISTORICAL FINANCIAL STATEMENTS OF ASSETS
AND LIABILITIES TO BE TRANSFERRED TO
AMERICAN COMMUNITY PROPERTIES TRUST AND SUBSIDIARIES
(1) ORGANIZATION AND BASIS OF PRESENTATION
Interstate General Company L.P. ("IGC") was formed as a Delaware limited
partnership in 1986. Directly and through predecessors, IGC has been engaged
in business since 1957. IGC has traded publicly as a master limited
partnership since February 1987 on the American Stock Exchange and Pacific
Stock Exchange. Company Management and the Board of Directors of IGC's
Managing General Partner are presently undertaking steps to restructure IGC.
IGC is a diversified real estate organization specializing in community
development, investment apartment properties, property management services and
homebuilding. IGC owns and participates in these operations directly and
through the following subsidiaries: Interstate General Properties, S.E.
("IGP"); St. Charles Associates Limited Partnership ("SCA"); Land Development
Associates, S.E. ("LDA"); and American Family Homes, Inc. ("AFH"). IGC's
assets and operations are concentrated primarily in the metropolitan areas of
Washington, D.C. and San Juan, Puerto Rico. Additionally, its homebuilding
operations are active in Virginia, North Carolina and South Carolina. Through
its wholly owned subsidiary Interstate Waste Technologies, Inc. ("IWT"), IGC
is involved in the pre-development of municipal waste treatment facilities.
American Community Properties Trust ("ACPT"), American Rental Properties
Trust ("American Rental"), American Rental Management Company ("American
Management"), American Land Development U.S., Inc. ("American Land") and
Interstate General Properties Group, S.E. ("IGP Group") are or will be formed
to carry out the restructuring of IGC. These entities and their subsidiaries
collectively represent American Community Portfolio Properties ("ACPP"). IGC
expects to transfer its principal operations to ACPT and distribute to the
partners of IGC, including its Unitholders, all the common shares of ACPT (the
"Restructuring"). Due to these companies being commonly controlled entities,
the transfers to ACPT will occur at book value.
ACPT is a Maryland real estate investment trust that is expected to be taxed
as a partnership. It is a self-managed holding company that owns all of the
outstanding equity interests in American Management, American Land, and IGP
Group and all of the common stock of American Rental.
AMERICAN RENTAL.
IGC expects to transfer to American Rental its partnership interests in
United States investment properties and its land in the United States
presently intended for development as apartment properties. The partnership
interests in 13 investment apartment properties ("U.S. Apartment
Partnerships") will be held by American Rental indirectly through American
Housing Properties L.P. ("American Housing"), a Maryland partnership, in which
American Rental will have a 99% limited partner interest and American Housing
Management Company, a wholly owned subsidiary of American Rental, will have a
1% general partner interest. The transfer of the general partner interest in
five partnerships requires limited partner approval which is not expected to
be obtained prior to the Restructuring. Therefore, IGC has assigned to ACPT
beneficial ownership in these partnerships ACPT has agreed to indemnify IGC
against any losses it may suffer as a result of being the general partner and
IGC will be obligated to remit to ACPT any cash received from these five
partnerships. To avoid termination of the partnership for tax purposes, sixty
percent of the general partners' interest in four additional partnerships will
not be transferred to ACPT until twelve months and one day after the date of
Restructure. Where control does not exist the cost method of accounting will
be used.
F-6
<PAGE>
AMERICAN COMMUNITY PORTFOLIO PROPERTIES
NOTES TO COMBINED HISTORICAL FINANCIAL STATEMENTS OF ASSETS
AND LIABILITIES TO BE TRANSFERRED TO
AMERICAN COMMUNITY PROPERTIES TRUST AND SUBSIDIARIES--(CONTINUED)
AMERICAN MANAGEMENT.
IGC expects to transfer to American Management its United States property
management operations. The United States property management operations
provide management services for the United States apartment properties and for
other rental apartments not owned by IGC.
AMERICAN LAND.
IGC expects to transfer to American Land its principal United States
property assets and operations. These will include the following:
1. A 100% interest in St. Charles Community LLC which holds 4,500 acres
of land in St. Charles, Maryland. This constitutes all of the land formerly
held by SCA, a partnership in which IGC holds a 99% partnership interest
and Interstate Business Corporation ("IBC") holds a 1% partnership
interest, except for a 50% interest in Brandywine Investment Associates
L.P., which holds 277 acres of land held for development in Brandywine,
Maryland, that will continue to be held by SCA. IGC also will retain 26
remaining single-family lots in Dorchester and an 800 acre tract held for
development in Pomfret, Maryland, 90 acres and 27 acres, respectively, in
the communities of Montclair and Westbury and the Wetlands Properties.
2. A 41.0346% interest in Maryland Cable Limited Partnership which holds
receivables from the 1988 sale of IGC's cable television assets.
3. The Class B IGP interest that represents IGP's rights to income, gains
and losses associated with land in Puerto Rico held by LDA and designated
for development as saleable property.
4. As part of the asset transfers, IGC conditionally has agreed to
Transfer to American Land 14 acres of land in St. Charles that currently is
zoned for commercial use (the "Commercial Parcel") if and when IGC settles
the wetlands litigation on terms approved by the Board of Directors of
IGMC, provided that IGC shall have received confirmation that the transfer
of the Commercial Parcel (and resulting decrease in the value of IGC's
assets) will not cause the IGC Units to be delisted from AMEX or the PSE.
The Commercial Parcel has a book value of approximately $1,000,000 at July
28, 1998. If IGC is unable to settle the wetlands litigation on
satisfactory terms or IGC does not receive confirmation of the continued
listing of IGC Units, IGC also will retain the Commercial Parcel.
There have been no adjustments made to the accompanying financial statements
to record the inclusion of the Commercial Parcel.
IGP GROUP.
IGC expects to transfer to IGP Group its entire 99% limited partnership
interest and 1% general partner interest in Interstate General Properties
Limited Partnership S.E., a Maryland partnership ("IGP") other than the Class
B IGP interest to be held by American Land. IGP's assets and operations will
continue to include:
1. an 80% partnership interest in LDA, a Puerto Rico special partnership,
which holds 312 acres of land in the planned community of Parque Escorial
and 543 acres of land in Canovanas. On June 25, 1998, LDA exercised its
right to acquire the 20% interest in LDA owned by an Unrelated third party
at a purchase price of $5.5 million. The Transaction is expected to be
financed with one-year commercial debt at rates comparable to the company's
existing debt. The collateral for the debt is expected to be assignment of
the interest being acquired and assignment of an existing note receivable
held by LDA for approximately $2,700,000. Following the purchase, IGP will
own 100% of LDA. This transaction is expected to close on July 30, 1998;
F-7
<PAGE>
AMERICAN COMMUNITY PORTFOLIO PROPERTIES
NOTES TO COMBINED HISTORICAL FINANCIAL STATEMENTS OF ASSETS
AND LIABILITIES TO BE TRANSFERRED TO
AMERICAN COMMUNITY PROPERTIES TRUST AND SUBSIDIARIES--(CONTINUED)
2. a 50% partnership interest in Escorial Builders Associates S.E.
("Escorial Builders"), which is engaged in the construction of condominiums
in the planned community of Parque Escorial;
3. a 1% interest in El Monte Properties S.E., a Puerto Rico special
partnership which owns El Monte Mall Complex, a 169,000 square foot office
complex in San Juan, Puerto Rico; and
4. general partner interests in 11 Puerto Rico apartment partnerships.
After these asset transfers have been completed, IGC expects to distribute
all of the outstanding common shares of ACPT to the general and limited
partners (including Unitholders) of IGC pro rata in accordance with their
percentage interest in IGC (the "Distribution"). Unitholders in the aggregate
will receive 99% of ACPT's common shares.
Basis of Presentation
The accompanying historical financial statements of ACPP have been presented
on a combined historical cost basis because of affiliated ownership, common
management and because assets and liabilities of IGC are expected to be
transferred to ACPT, a newly formed entity with no prior operations. IGC's
historical basis in the assets and liabilities of ACPP has been carried over
to the combined historical financial statements. Certain assets and
liabilities of IGC will not be contributed to ACPP and, therefore, these
financial statements are not intended to represent the financial positions and
results of operations of IGC or any entity included therein. In management's
opinion, these financial statements include the assets, liabilities, revenues
and expenses associated with the portions of IGC intended to be transferred to
ACPT. All significant intercompany balances and transactions have been
eliminated in the presentation. Changes in the capital account represent the
net income of ACPP, the exercise of employee and director options, asset
transfers less cash distributions to Unitholders and net cash (distributions
to) contributions from IGC.
The combined historical financial statements include the accounts of ACPP
and its majority owned partnerships and subsidiaries, after eliminating
intercompany transactions. All of the entities included in the combined
historical financial statements are hereinafter referred to collectively as
the "Company" or "ACPP". As of December 31, 1997, the combined group includes
ACPT, American Rental, American Management, American Land and IGP Group. The
following entities are consolidated with American Rental: Lancaster Apartments
Limited Partnership, New Forest Apartments Partnership, Fox Chase Apartments
General Partnership, Palmer Apartments Associates Limited Partnership, Headen
House Associates Limited Partnership, Wakefield Terrace Associates Limited
Partnership and Wakefield Third Age Associates Limited Partnership.
F-8
<PAGE>
AMERICAN COMMUNITY PORTFOLIO PROPERTIES
NOTES TO COMBINED HISTORICAL FINANCIAL STATEMENTS OF ASSETS
AND LIABILITIES TO BE TRANSFERRED TO
AMERICAN COMMUNITY PROPERTIES TRUST AND SUBSIDIARIES--(CONTINUED)
An analysis of the activity in the capital account for each of the three
years ended December 31, 1997 is as follows (in thousands):
<TABLE>
<S> <C>
Balance, December 31, 1994.......................................... $10,176
Net income........................................................ 3,804
Employee and director IGC Unit options exercised.................. 171
Cash (distributions to) contributions from IGC, net............... (938)
-------
Balance, December 31, 1995.......................................... $13,213
Net income........................................................ 12,695
Exchange of assets between Company and Unitholder................. (20)
Cash distributions to Unitholders................................. (1,140)
Cash (distributions to) contributions from IGC, net............... (4,660)
-------
Balance, December 31, 1996.......................................... $20,088
Net income........................................................ 1,394
Issuance of warrants.............................................. 279
Cash (distributions to) contributions from IGC, net............... (5,745)
-------
Balance, December 31, 1997.......................................... $16,016
=======
</TABLE>
Certain general and administrative costs of IGC are allocated to ACPP,
principally based on IGC's specific identification of individual cost items
and otherwise based upon estimated levels of effort devoted by its general and
administrative departments to individual entities or relative measures of size
of the entities based on assets or operating profit. Such allocated amounts
are included in general and administrative expenses. In the opinion of
management, the methods for allocating corporate general and administrative
expenses and other direct costs are reasonable. It is not practicable to
estimate the costs that would have been incurred by ACPP if it had been
operated on a stand-alone basis. ACPP has estimated that the general and
administrative annual expense levels would increase approximately $130,000
annually after the Restructuring.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies is as follows:
Sales and Profit Recognition and Cost Capitalization
Community development land sales are recognized at closing only when
sufficient down payments have been obtained, possession and other attributes
of ownership have been transferred to the buyer, and ACPP has no significant
continuing involvement.
The costs of acquiring and developing land are allocated to these assets and
charged to cost of sales as the related inventories are sold. ACPP's interest
costs related to land assets are allocated to these assets based on their
development stage and relative book value. The portion of interest allocated
to land during the development and construction period is capitalized.
Remaining interest costs are expensed. ACPP carries rental properties, land
and development costs at the lower of cost or net realizable value.
Quarterly, ACPP evaluates the carrying value of its long-lived assets in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." In cases where management
is holding for sale particular properties, ACPP assesses impairment based on
whether the net realizable value (estimated sales price less costs of
disposal) of each individual property to be sold is less than
F-9
<PAGE>
AMERICAN COMMUNITY PORTFOLIO PROPERTIES
NOTES TO COMBINED HISTORICAL FINANCIAL STATEMENTS OF ASSETS
AND LIABILITIES TO BE TRANSFERRED TO
AMERICAN COMMUNITY PROPERTIES TRUST AND SUBSIDIARIES--(CONTINUED)
the net book value. A property is considered to be held for sale when ACPP has
made the decision to dispose of the property. Otherwise, ACPP assesses
impairment of its real estate properties based on whether it is probable that
undiscounted future cash flows from each individual property will be less than
its net book value. If a property is impaired, its basis is adjusted to its
fair market value.
Selling and Marketing Expenses
Selling and marketing expenses consist primarily of advertising costs, which
include costs of printed materials, signs, displays, and general marketing
costs. These costs are expensed as incurred.
Management Fees
ACPP records management fees in the period in which services are rendered.
Depreciation and Amortization
Buildings are depreciated over 35 to 40 years using the straight-line
method. Furniture, fixtures and equipment are depreciated over five to seven
years using the straight-line method. Deferred expenses are amortized over the
period of estimated benefit using the straight-line method.
Investment in Rental Property Partnerships
ACPP's investment in rental property partnerships consists of long-term
receivables, nominal capital contributions, working capital loans and ACPP's
share of unconsolidated partnership income and losses. The working capital
loans receive priority distributions from the cash flow generated from the
operations of the partnerships. The long-term receivables represent loans to
the partnerships for payment of construction and development costs in excess
of the project mortgages. Substantially all of the long-term receivables are
non- interest bearing and have been discounted at an effective rate of 14%
based on the projected maturity date which will occur upon the refinancing,
sale or other disposition of the partnerships' properties. The discount, which
represents deferred sponsor and developer fees, is netted in the combined
historical financial statements against the long-term receivables.
Certain partnerships are accumulating cash from operations in excess of the
maximum distribution amounts permitted by U.S. Department of Housing and Urban
Development ("HUD") and other regulatory authorities. This cash, accumulated
in restricted cash accounts, will be available to pay the long-term
receivables due to ACPP and to make cash distributions to ACPP and the limited
partners when the partnerships' projects are refinanced or sold.
Pursuant to the partnership agreements, the general partners of the
unconsolidated partnerships are prohibited from selling or refinancing the
apartment complexes without majority limited partner approval. Due to the
absence of control and non-majority ownership, these partnerships are
accounted for under the equity method of accounting. For those partnerships
which ACPP does not have control, the cost method of accounting will be used.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, unrestricted deposits with
financial institutions and short-term investments with original maturities of
three months or less.
F-10
<PAGE>
AMERICAN COMMUNITY PORTFOLIO PROPERTIES
NOTES TO COMBINED HISTORICAL FINANCIAL STATEMENTS OF ASSETS
AND LIABILITIES TO BE TRANSFERRED TO
AMERICAN COMMUNITY PROPERTIES TRUST AND SUBSIDIARIES--(CONTINUED)
Income Taxes
ACPP does not expect to be subject to U.S. income taxes under current law.
Its Unitholders are expected to be taxed directly on their share of ACPP's
income. Subsequent to the completion of the Distribution, American Land and
American Management are expected to be subject to tax at the applicable
corporate rates. American Rental, which expects to qualify as a real estate
investment trust, does not expect to be subject to tax under current law.
Furthermore, IGP is expected to be subject to Puerto Rico income tax on its
Puerto Rico source income.
The combined historical financial statements of ACPP have been presented
without effect for income taxes of American Land, American Management and
American Rental because IGC is not currently subject to U.S. income tax on its
U.S. source income.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Impact of Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128 "Earnings Per Share", which is effective for fiscal years ending after
December 15, 1997, including interim periods. ACPP adopted SFAS No. 128 in the
fourth quarter of 1997 and the impact was not significant.
During 1997, ACPP adopted the provisions of SFAS No. 129 "Disclosure of
Information about Capital Structure." The adoption of SFAS No. 129 did not
have a material effect on ACPP's financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130
"Reporting Comprehensive Income", which is effective for fiscal years
beginning after December 15, 1997. The statement establishes standards for
reporting and display of comprehensive income and its components. ACPP plans
to adopt SFAS No. 130 in 1998 and the impact is not expected to be
significant.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information", which
is effective for fiscal years beginning after December 15, 1997. ACPP plans to
adopt SFAS No. 131 in 1998.
In February 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits." The statement revises employers' disclosures about pension and
other postretirement benefit plans and is effective for fiscal years beginning
after December 15, 1997. ACPP plans to adopt SFAS No. 132 in 1998 and the
impact is not expected to be significant.
(3) FINANCING AND CASH MANAGEMENT MATTERS
ACPP has historically met its liquidity requirements principally from cash
flow generated from home and land sales, property management fees,
distributions from residential rental partnerships and from bank financing
providing funds for development and working capital.
F-11
<PAGE>
AMERICAN COMMUNITY PORTFOLIO PROPERTIES
NOTES TO COMBINED HISTORICAL FINANCIAL STATEMENTS OF ASSETS
AND LIABILITIES TO BE TRANSFERRED TO
AMERICAN COMMUNITY PROPERTIES TRUST AND SUBSIDIARIES--(CONTINUED)
Over the past several years, cash flows have been constrained because of the
terms of its existing debt agreements and the reluctance of new lending
opportunities as a result of the Wetlands litigation (see Note 6). As a
result, substantially all of the cash generated has been used to pay debt
service requirements with existing lenders. This resulted in limited
opportunities for new construction and development. The recently closed Banc
One financing provided funding to commence construction in Fairway Village,
the third village in St. Charles, and will allow ACPP to retain a greater
portion of its U.S. land sales proceeds. ACPP currently has other development
projects in various stages of completion. Substantially all of the projects
under construction have sufficient development loans in place to complete the
construction.
ACPP's principal demands for liquidity are expected to be the continued
funding of its current debt service and operating requirements. After the
Distribution, management expects to obtain additional funding which can be
used to fund new community development projects. There is no assurance that
sufficient funding will be obtained to meet its future debt service or other
operating cash flow needs.
(4) INVESTMENT IN UNCONSOLIDATED PARTNERSHIPS
Housing Partnerships
The following information summarizes financial data and principal activities
of unconsolidated housing partnerships which ACPP accounts for under the
equity method (in thousands).
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Summary of Financial Position:
Total assets......................................... $ 111,974 $ 113,514
Total non-recourse debt.............................. 118,002 109,593
Total other liabilities.............................. 10,016 9,751
Total equity......................................... (16,043) (5,800)
Company's investment................................. 8,657 11,693
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
-----------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Summary of Operations:
Total revenue.................................... $27,913 $30,872 $36,858
Net income....................................... 328 1,698 2,500
Company's recognition of equity in earnings and
developer fees.................................. 1,417 2,023 2,514
<CAPTION>
FOR THE YEAR ENDED
-----------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Summary of Operating Cash Flows:
Cash flows from operating activities............. $ 3,412 $ 7,358 $ 8,613
Company's share of cash flows from operating
activities...................................... 1,051 2,814 3,435
Operating cash distributions..................... 10,648 1,620 2,607
Company's share of operating cash distributions.. 5,155 409 980
Summary of 1996 Sales Transaction:
Gain on sale..................................... $39,934
Company's equity and earnings recognition........ 14,637
Total distribution of sales proceeds............. 36,235
Company's share of sales proceeds distribution... 15,165
</TABLE>
F-12
<PAGE>
AMERICAN COMMUNITY PORTFOLIO PROPERTIES
NOTES TO COMBINED HISTORICAL FINANCIAL STATEMENTS OF ASSETS
AND LIABILITIES TO BE TRANSFERRED TO
AMERICAN COMMUNITY PROPERTIES TRUST AND SUBSIDIARIES--(CONTINUED)
COMPARABLE PARTNERSHIP RESULTS: The unconsolidated rental properties
partnerships as of December 31, 1997 include 17 partnerships owning 4,159
rental units in 20 apartment complexes. ACPP holds a general partner interest
in these partnerships and generally shares in zero to 5% of profits, losses
and cash flow from operations until such time as the limited partners have
received cash distributions, equal to their capital contributions. Thereafter,
ACPP generally shares in 50% of cash distributions from operations.
Lakeside Apartments was placed in service in 1996. The remaining complexes
owned by Alturas Del Senorial Associates Limited Partnership, Bannister
Associates Limited Partnership, Bayamon Gardens Associates Limited
Partnership, Brookside Gardens, Carolina Associates Limited Partnership,
Colinas de San Juan Associates Limited Partnership, Crossland Associates
Limited Partnership, Essex Apartments Associates, Huntington Associates
Limited Partnership, Jardines de Caparra Associates Limited Partnership,
Monserrate Associates Limited Partnership, Monte de Oro Associates Limited
Partnership, New Center Associates Limited Partnership, San Anton Associates
Limited Partnership, Turabo Limited Dividend Partnership and Valle del Sol
Limited Partnership were placed in service prior to 1995.
ACTIVITY PRIOR TO CONSOLIDATION OF FOUR PARTNERSHIPS: On April 1, 1996, ACPP
acquired a controlling interest in four partnerships owning 596 rental units,
Wakefield Third Age L.P., Wakefield Terrace Associates L.P., Palmer Apartments
L.P. and Headen House Associates L.P. Effective April 1, 1996, the results of
operations and balance sheets of these partnerships are consolidated in the
accompanying combined historical financial statements.
ACTIVITY PRIOR TO SALE OF FOUR APARTMENTS: In March 1996, ACPP completed the
sale of four Puerto Rico apartment properties. The four properties, Las
Americas I, Las Americas II, Las Lomas and Monacillos, totaling 918 units were
purchased by non-profit organizations with financing provided by HUD through
capital grants authorized by the Low Income Housing Preservation and Resident
Homeownership Act ("LIHPRHA"). ACPP retained the management contract for these
properties. Prior to the sale, the properties were accounted for using the
equity method of accounting.
Homebuilding Joint Venture
ACPP holds a 50% joint venture interest in Escorial Builders S.E. Escorial
Builders was formed in 1995 to purchase lots from ACPP and construct homes for
resale. During 1997 and 1996, it purchased 118 and 98 lots, respectively. The
profit on these lots are deferred until sold by Escorial Builders to a third
party. ACPP's share of the income (loss) and its investment are included with
ACPP's assets related to homebuilding in the accompanying combined historical
financial statements. The table summarizes Escorial Builders' financial
information (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------
1997 1996
--------- ---------
<S> <C> <C>
Summary of Financial Position:
Total assets........................................... $ 13,719 $ 5,586
Total liabilities...................................... 12,536 5,047
Total equity........................................... 1,183 539
Company's investment................................... 591 275
</TABLE>
F-13
<PAGE>
AMERICAN COMMUNITY PORTFOLIO PROPERTIES
NOTES TO COMBINED HISTORICAL FINANCIAL STATEMENTS OF ASSETS
AND LIABILITIES TO BE TRANSFERRED TO
AMERICAN COMMUNITY PROPERTIES TRUST AND SUBSIDIARIES--(CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
-----------------------
1997 1996 1995
------- ------- -----
<S> <C> <C> <C>
Summary of Operations:
Total revenue.................................... $ 2,491 $ -- $ --
Net income (loss)................................ 183 (151) --
Company's recognition of equity in earnings...... 92 (75) --
<CAPTION>
FOR THE YEAR ENDED
-----------------------
1997 1996 1995
------- ------- -----
<S> <C> <C> <C>
Summary of Operating Cash Flows:
Cash flows from operating activities............. $(7,326) $(4,361) $ --
Company's share of cash flows from operating
activities...................................... (3,663) (2,181) --
Operating cash distributions..................... -- -- --
Company's share of operating cash distributions.. -- -- --
</TABLE>
(5) DEBT AND EXTRAORDINARY ITEM--EARLY EXTINGUISHMENT OF DEBT
Debt
ACPP's outstanding debt is collateralized primarily by land, land
improvements, housing, receivables, investments in partnerships, and rental
properties. In certain cases, there are cross-collateral and cross-default
provisions pursuant to the debt agreements. The following table summarizes the
indebtedness expected to be transferred to ACPP as of December 31, 1997 and
1996 (in thousands):
<TABLE>
<CAPTION>
OUTSTANDING
MATURITY INTEREST DECEMBER 31,
DATES RATES ---------------
FROM/TO FROM/TO 1997 1996
--------- -------- ------- -------
<S> <C> <C> <C> <C>
Related to community development:
Recourse debt......................... Demand/ 9.0%/ $39,784 $38,943
07-31-04 10.0%
Non-recourse debt..................... 08-02-09 P+1.5% 2,295 2,153
Related to rental properties:
Recourse debt......................... Demand 7.35% 969 1,139
Non-recourse debt..................... 10-01-19/ 6.85%/ 39,101 39,508
10-01-28 8.50%
General:
Notes payable and capital leases...... 04-30-98/ 7.4%/ 173 157
08-01-02 12.00%
------- -------
Total debt.......................... $82,322 $81,900
======= =======
</TABLE>
- --------
P = Prime lending interest rate.
ACPP's loans contain various financial, cross-default and technical
provisions.
ACPP's weighted average interest rate during 1997 on its variable rate debt
was 10.07%
As of December 31, 1997, the $39,784,000 of recourse debt related to
community development assets is fully collateralized by substantially all of
the community development assets. Approximately $15,054,000 of this amount is
further secured by investments in apartment rental partnerships.
F-14
<PAGE>
AMERICAN COMMUNITY PORTFOLIO PROPERTIES
NOTES TO COMBINED HISTORICAL FINANCIAL STATEMENTS OF ASSETS
AND LIABILITIES TO BE TRANSFERRED TO
AMERICAN COMMUNITY PROPERTIES TRUST AND SUBSIDIARIES--(CONTINUED)
As of December 31, 1997, recourse investment property debt is secured by a
letter of credit issued to ACPP pursuant to the terms of a sales contract. The
non-recourse investment properties debt is collateralized by apartment
projects. Mortgage notes payable of $7,244,000 have stated interest rates of
7.5% and 7.75%. After deducting interest payments provided by HUD, the
effective interest rate over the life of the loan is 1%.
ACPP's loan with Banc One, obtained during 1997, requires additional
interest payments on each annual anniversary date. The additional amount due
is 1% of the outstanding balance in 1998 and 1999, and increases 1/2% each
year thereafter, through 2003.
The stated maturities (assuming no accelerations) of ACPP's indebtedness at
December 31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
1998................................................................. $19,422
1999................................................................. 5,511
2000................................................................. 3,552
2001................................................................. 3,601
2002................................................................. 3,681
Thereafter........................................................... 46,555
-------
$82,322
=======
</TABLE>
The interest costs incurred were accounted for as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Expensed................................................ $3,820 $4,433 $4,263
Capitalized............................................. 3,434 4,394 3,665
------ ------ ------
$7,254 $8,827 $7,928
====== ====== ======
</TABLE>
Extraordinary Item--Early Extinguishment of Debt
On December 23, 1996, ACPP completed the restructuring of two non-recourse
mortgages that will provide an interest savings of approximately $12,000,000
over the life of the loan. The new mortgage notes payable of $18,700,000 bear
average annual interest rate over the life of the loans at approximately 6.8%
compared to approximately 9.7% for the old loans. Prepayment fees of $932,000
were paid to the prior lender and charged as an extraordinary item in the
accompanying financial statements. The loans are secured by the rental
properties owned by two consolidated partnerships.
(6) OTHER COMMITMENTS AND CONTINGENT LIABILITIES
Wetlands Litigation
On February 29, 1996, IGC, SCA and James J. Wilson were convicted on four
felony counts of violations of Section 404 (wetlands) of the U.S. Clean Water
Act relating to discharge without a permit of fill material into wetlands
within the U.S. Army Corps of Engineers' regulatory jurisdiction. The nine
civil violations of the U.S. Clean Water Act filed by the U.S. Attorney were
dismissed without prejudice. On June 17, 1996, IGC and SCA were fined
$2,000,000 and $1,000,000, respectively, placed on probation for five years
and ordered to implement
F-15
<PAGE>
AMERICAN COMMUNITY PORTFOLIO PROPERTIES
NOTES TO COMBINED HISTORICAL FINANCIAL STATEMENTS OF ASSETS
AND LIABILITIES TO BE TRANSFERRED TO
AMERICAN COMMUNITY PROPERTIES TRUST AND SUBSIDIARIES--(CONTINUED)
a wetlands restoration and mitigation plan proposed by the government. Mr.
Wilson was fined $1,000,000 and sentenced to 21 months imprisonment and one
year of supervised release. Appeals were filed and Mr. Wilson's sentence was
stayed pending appeal by the Court of Appeals. The wetlands properties subject
to this litigation are being retained by IGC which remain responsible for
restoration and mitigation costs. IGC has paid the aggregate $3,000,000 in
fines on behalf of itself and SCA.
On December 23, 1997, the United States Court of Appeals for the Fourth
Circuit reversed the 1996 wetlands convictions of IGC, SCA and James J.
Wilson, IGC's Chief Executive Officer. The Court's action eliminates the
$3,000,000 fine and remediation obligation that had been imputed as part of
IGC's criminal sentence. On January 26, 1998, the U.S. Attorney's office
petitioned for the Court of Appeals' panel to rehear the case. The Court of
Appeals denied their request. The U.S. Attorney can retry the case or pursue
the civil violations subject to the Court of Appeals published opinions. As a
result of the convictions being reversed by the Court of Appeals, the fine of
$3,000,000 which was previously paid has been refunded to IGC.
In reversing the convictions, the Appeals Court voided regulations that
defined "waters of the United States" to include intrastate wetlands that
could affect interstate commerce. However, the appellate decision did not
foreclose a determination upon retrial that IGC's Wetlands Properties are
"waters of the United States" because they are "adjacent" to "navigable
waters" within the meaning of the Clean Water Act. Other courts have construed
"adjacent" to mean "reasonably proximate" or "closely related." IGC's Wetlands
Properties are over 9 miles from the nearest "navigable waters."
In the event that IGC is convicted should there be a retrial, IGC may be
responsible for paying the costs incurred in implementing a restoration and
remediation plan. The terms of the Banc One credit facility provide that IGC
may borrow up to $2,000,000 solely for use to pay remediation costs resulting
from the wetlands litigation. However, ACPP will assume the repayment
responsibility for the amounts drawn by IGC for remediation purposes.
Management of IGC intends to dispose of the retained land or borrow against
its value to the extent necessary to pay remediation costs.
The ultimate outcome of this litigation remains uncertain. Representatives
of the U.S. Attorney's office have stated publicly that the government intends
to retry the criminal case. However, counsel for IGC is currently engaged in
negotiations with the U.S. Attorney's office on a possible disposition of the
Wetlands litigation that would require payment of a fine by IGC, remediation
of a portion of two parcels in St. Charles and IGC's undertaking an
environmental compliance program. IGC would also plead guilty to a single
felony count. All other criminal charges in the indictment against IGC and its
president, James J. Wilson, would be dropped. The foregoing settlement
proposal has not as yet been agreed upon by either IGC or the U.S. Government,
and there are a number of issues that are still under discussion. If agreement
is reached, the disposition must be approved by the court. Management believes
that the cost of such a settlement would not be materially greater than the
amount ($1.5 million) reserved by IGC for the Wetlands litigation. A portion
of the land in St. Charles presently encumbered by the Wetlands litigation
would become available for development if such a settlement is reached.
Other
As of December 31, 1997, ACPP is guarantor of $7,178,000 of letters of
credit and surety bonds for land development completion.
IGP Group has assigned the receivables and cash proceeds from three
apartment properties to serve as collateral for a letter of credit in the
amount of $4,569,000 issued for the benefit of Chastleton Apartment Associates
Limited Partnership, an entity related to IBC and IGC.
F-16
<PAGE>
AMERICAN COMMUNITY PORTFOLIO PROPERTIES
NOTES TO COMBINED HISTORICAL FINANCIAL STATEMENTS OF ASSETS
AND LIABILITIES TO BE TRANSFERRED TO
AMERICAN COMMUNITY PROPERTIES TRUST AND SUBSIDIARIES--(CONTINUED)
ACPP will enter into a consulting and retirement compensation agreement with
IGC's founder and Chief Executive Officer, James J. Wilson, to become
effective on the date of the Restructuring (the "Consulting Agreement"). The
Consulting Agreement will provide for annual cash payments during the first
two years of $500,000 and annual cash payments for eight years thereafter of
$200,000.
In the normal course of business, ACPP is involved in various types of
pending or unasserted claims. In the opinion of management, these will not
have a material impact on the financial condition or future operations of
ACPP.
(7) LEASES
ACPP operates certain property and equipment under leases, some with
purchase options that expire at various dates through 2005. ACPP is also
obligated under several non-cancelable operating leases for office space and
equipment. Future minimum lease payments are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITALIZED
LEASES LEASES
--------- -----------
<S> <C> <C>
1998................................................... $ 413 $ 65
1999................................................... 396 54
2000................................................... 381 46
2001................................................... 298 26
2002................................................... 149 15
Thereafter............................................. 370 --
------ ----
Total minimum lease payments........................... $2,007 206
Less amount representing interest...................... 33
----
Present value of lease payments........................ $173
</TABLE>
Rental expense under noncancelable operating leases was $417,000 in 1997,
$441,000 in 1996 and $393,000 in 1995 and is included in general and
administrative expenses in the accompanying combined historical statements of
operations.
(8) RETIREMENT PLAN
ACPP will continue and assume all of IGC's obligations under the retirement
plan currently maintained by IGC (the "Retirement Plan"). Employees are
generally eligible to participate when they complete one year of service. The
Retirement Plan is a defined contribution plan which provides for
contributions by ACPP for the accounts of eligible employees in amounts equal
to 4% of base salaries and wages not in excess of the U.S. Social Security
taxable wage base, and 8% of salaries (limited to $160,000) that exceeded that
wage base. Eligible employees also may make voluntary contributions to their
accounts and self-direct the investment of their account balances in various
investment funds that may be selected under the plan.
Contributions to the Retirement Plan were $467,000, $407,000 and $349,000
for the years ended December 31, 1997, 1996 and 1995, respectively.
F-17
<PAGE>
AMERICAN COMMUNITY PORTFOLIO PROPERTIES
NOTES TO COMBINED HISTORICAL FINANCIAL STATEMENTS OF ASSETS
AND LIABILITIES TO BE TRANSFERRED TO
AMERICAN COMMUNITY PROPERTIES TRUST AND SUBSIDIARIES--(CONTINUED)
(9) RELATED PARTY TRANSACTIONS
Certain officers, trustees and one consultant of ACPP, Interstate General
Company L.P. ("IGC") and Interstate Business Corporation ("IBC"), a general
partner of IGC, have ownership interests in various entities that conduct
business with ACPP. The financial impact of the related party transactions on
the accompanying combined historical statements of operations and combined
historical statements of assets and liabilities are reflected below (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- -------- -------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS IMPACT:
Community Development--Land Sales (A)
IGC.......................................... $ 105 $ 980 $ 875
Affiliate of IGC former director............. (A1) -- 2,984 3,233
Affiliate of IGC former director............. (A1) -- 2,720 --
IBC, general partner of IGC.................. -- 1,869 --
Affiliate of IBC, general partner of IGC..... -- 1,513 --
Affiliate of IBC, general partner of IGC and
James Michael Wilson, IGC director.......... (A2) 3,000 -- --
------- -------- -------
$ 3,105 $ 10,066 $ 4,108
======= ======== =======
Cost of Land Sales
IGC.......................................... $ 74 $ 686 $ 613
Affiliate of IGC former director............. -- 1,813 1,539
Affiliate of IGC former director............. -- 2,310 --
IBC, general partner of IGC.................. -- 586 --
Affiliate of IBC, general partner of IGC..... -- 680 --
Affiliate of IBC, general partner of IGC and
James Michael Wilson, IGC director.......... (A2) 1,689 -- --
------- -------- -------
$ 1,763 $ 6,075 $ 2,152
======= ======== =======
Management and Other Fees (B)
Unconsolidated subsidiaries................... $ 2,790 $ 3,993 $ 2,908
Affiliate of IBC, general partner of IGC...... (B1,2) 343 248 650
Affiliates of James Michael Wilson, trustee
and IGC director, Thomas B. Wilson, trustee
and IGC director, and James J. Wilson, IGC
director..................................... 148 193 239
Affiliate of James Michael Wilson, trustee and
IGC director, Thomas B. Wilson, trustee and
IGC director, James J. Wilson, IGC director
and an affiliate of IBC, general partner of
IGC.......................................... 68 113 67
IBC, general partner of IGC................... -- 12 30
------- -------- -------
$ 3,349 $ 4,559 $ 3,894
======= ======== =======
Interest and Other Income
Unconsolidated subsidiaries................... $ 49 $ 49 $ 90
Affiliate of IGC former director.............. 263 429 197
Affiliate of IBC, general partner of IGC...... 120 -- --
IBC, general partner of IGC................... -- 8 33
Affiliate of Thomas B. Wilson, trustee, IGC
director..................................... 16 17 18
------- -------- -------
$ 448 $ 503 $ 338
======= ======== =======
General and Administrative Expense
Affiliate of IBC, general partner of IGC..... (C1) $ 339 $ 361 $ 369
Reserve additions (reductions) and other
write-offs
Affiliate of IGC former director............. (A1) 388 319 32
Affiliate of IBC, general partner of IGC..... (B) 117 69 --
Affiliate of Thomas B. Wilson, trustee and
IGC director................................ 83 -- --
Unconsolidated subsidiary.................... 213 101 91
------- -------- -------
$ 1,140 $ 850 $ 492
======= ======== =======
</TABLE>
F-18
<PAGE>
AMERICAN COMMUNITY PORTFOLIO PROPERTIES
NOTES TO COMBINED HISTORICAL FINANCIAL STATEMENTS OF ASSETS
AND LIABILITIES TO BE TRANSFERRED TO
AMERICAN COMMUNITY PROPERTIES TRUST AND SUBSIDIARIES--(CONTINUED)
<TABLE>
<CAPTION>
INCREASE INCREASE
(DECREASE) (DECREASE)
BALANCE IN BALANCE IN
DECEMBER 31, RESERVES DECEMBER 31, RESERVES
1997 1997 1996 1996
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF ASSETS AND
LIABILITIES:
Assets Related to Rental
Properties--Receivables all unsecured and
(B) due on demand
Unconsolidated
subsidiaries.......... $ 539 $111 $ 668 $(315)
Affiliates of IBC, gen-
eral partner of IGC... (B1,2) 51 (9) 65 69
Affiliates of James
Michael Wilson,
trustee and IGC direc-
tor and James J.
Wilson, IGC director.. 20 -- 64 --
Affiliate of James J.
Wilson, IGC director.. -- -- -- --
------ ---- ------ -----
$ 610 $102 $ 797 $(246)
====== ==== ====== =====
Assets Related to
Community Development
Notes receivable and
accrued interest
Affiliate of IGC former Interest 10% (A1)
director secured by payments per month
land.................. $27,000 matures
April 1, 1998 $ 980 $-- $1,042 $ 222
Affiliate of IGC former Interest 10% (A1)
director secured by payments per month
land.................. $27,000, matures
April 1, 1999 2,088 388 2,502 97
Affiliates of IBC, gen- Interest 8%
eral partner of IGC matured December
secured by land....... 15, 1997, paid -- -- 1,193 --
Affiliate of IBC, gen- Interest P+1.5%
eral partner of IGC matures
secured by land....... June 29, 1998 (A2) 2,520 -- -- --
------ ---- ------ -----
$5,588 $388 $4,737 $ 319
====== ==== ====== =====
Other Assets--Receiv-
ables.................. All unsecured
IBC, general partner of payable from IGC
IGC................... distributions (C2) $ 681 $-- $ 881 $ --
Affiliate of Thomas B. payable from
Wilson, trustee, IGC surplus cash
director.............. matures -- -- 281 --
Affiliates of IBC, demand
general partner of
IGC................... (B) 12 -- 79 --
------ ---- ------ -----
$ 693 $-- $1,241 $ --
====== ==== ====== =====
Liabilities Related to
Community Development
Accounts payable
Whitman Requardt..... (C3) $ 121 $-- $ 324 $ --
====== ==== ====== =====
</TABLE>
F-19
<PAGE>
AMERICAN COMMUNITY PORTFOLIO PROPERTIES
NOTES TO COMBINED HISTORICAL FINANCIAL STATEMENTS OF ASSETS
AND LIABILITIES TO BE TRANSFERRED TO
AMERICAN COMMUNITY PROPERTIES TRUST AND SUBSIDIARIES--(CONTINUED)
(A) Land Sales
ACPP sells land to affiliates and non-affiliates with similar terms on a
routine basis. The sales prices to affiliates are based on third party
appraisals, payable in cash or a combination of a 20% cash down payment and a
note for the balance. The notes receivable are secured by deeds of trust on
the land sold, bear an interest rate equal to those charged at that time for
land sales. The notes mature in one year or mature in five or less years with
annual amortizations. As circumstances dictate, the maturity dates and
repayment terms of the notes receivable due from affiliates or non-affiliates
have been modified. Any sales transactions that vary from these terms are
described below:
(1) The notes receivable due from an affiliate of Jorge Colon-Nevares, a
former director of IGC, did not bear interest until certain infrastructure
improvements were completed. This infrastructure was delayed and the
interest commencement dates modified. These delays created the additional
discounts reflected above.
(2) On June 30, 1997, ACPP sold 374 acres to an affiliate of IBC for
$3,000,000 and recognized a profit of $1,311,000. As payment for this
parcel, ACPP received a 20% down payment and assumption of a note payable.
(B) Management and Other Services
ACPP provides management and other support services to its unconsolidated
subsidiaries and other related entities in the normal course of business.
These fees are typically collected on a monthly basis, one month in arrears.
These receivables are unsecured and due upon demand. Certain partnerships
experiencing cash shortfalls have not paid timely. As such, these receivable
balances are reserved until satisfied or the prospects of collectibility
improves. Decreases to the reserves for other than routine cash payments are
discussed below:
(1) On April 1, 1996, IBC transferred its remaining 1.1% limited
partnership interest in four housing partnerships to ACPP for its market
value of $69,000 as partial satisfaction of a note receivable. The balance
of this note receivable and other receivables were purchased by an
affiliate of James Michael Wilson for a cash payment of $1,279,000. The
collection of the majority of these receivables was uncertain and $390,000
had been reserved. This transaction resulted in income recognition of these
reserves during the second quarter of 1996.
(2) During the second quarter of 1997, an affiliate of IBC purchased the
management fees receivable due from Chastleton, Coachman's, Rolling Hills,
and Village Lake for a cash payment of $190,000. The collection of these
receivables had previously been questionable and they had been fully
reserved. This transaction resulted in income recognition of $190,000.
(C) Other
Other transactions with related parties are as follows:
(1) ACPP rents executive office space and other property from affiliates
both in the United States and Puerto Rico pursuant to leases that expire
through 2005. In management's opinion, all leases with affiliated persons
are on terms generally available from unaffiliated persons for comparable
property.
(2) During 1996, the sale of four properties in Puerto Rico triggered a
taxable gain, a portion of which is passed through to the predecessor of
IGC that contributed those assets. IGC's partnership agreement provides for
(1) an allocation to that predecessor of the income tax payable in Puerto
Rico on such portion of the gain and (2) a reduction from its cash
distributions in an amount equivalent to the Puerto Rico income tax
specifically allocated to the predecessor. In accordance with these
provisions, ACPP recorded a receivable from IBC of $881,000 and will
recover the amount from future distributions due to IBC.
F-20
<PAGE>
AMERICAN COMMUNITY PORTFOLIO PROPERTIES
NOTES TO COMBINED HISTORICAL FINANCIAL STATEMENTS OF ASSETS
AND LIABILITIES TO BE TRANSFERRED TO
AMERICAN COMMUNITY PROPERTIES TRUST AND SUBSIDIARIES--(CONTINUED)
(3) Thomas J. Shafer will become a Trustee of ACPP subsequent to his
retirement from Whitman, Requardt, where he is currently a Senior Partner.
Whitman, Requardt provides engineering services to ACPP. In management's
opinion, services performed are on terms available to other clients.
(4) James J. Wilson, as a general partner of IGP, is entitled to priority
distributions made by each housing partnership in which IGP is the general
partner. If IGP receives a distribution which represents 1% or less of a
partnership's total distribution, Mr. Wilson receives the entire
distribution. If IGP receives a distribution which represents more than 1%
of a partnership's total distribution, Mr. Wilson receives the first 1% of
such total. Prior to the Restructuring, Mr. Wilson will transfer his
general partner interest in IGP to a subsidiary of ACPP.
(10) OPTIONS AND APPRECIATION RIGHTS
ACPP expects to adopt a share incentive plan (the "Share Incentive Plan")
and a Trustees share incentive plan (the "Trustee Share Plan") to provide for
Share-based incentive compensation for officers, key employees and Trustees.
Under the Share Incentive Plan, the Compensation Committee of the Board of
Trustees may grant to key employees the following types of share-based
incentive compensation awards ("Awards") (i) options to purchase a specified
number of shares ("Options"), (ii) forfeitable shares that vest upon the
occurrence of certain vesting criteria ("Restricted Shares"), or (iii) Share
Appreciation Rights ("Rights") that entitle the holder to receive upon
exercise an amount payable in cash, shares or other property (or any
combination of the foregoing) equal to the difference between the market value
of shares and a base price fixed on the date of grant. A total of 500,000
shares will be reserved for issuance under the Share Incentive Plan.
The Share Incentive Plan authorizes the Compensation Committee to determine
the exercise price and manner of payment for Options and the base price for
Rights. The Compensation Committee also is authorized to determine the
duration and vesting criteria for Awards, including whether vesting will be
accelerated upon a change in control of ACPP.
Rights of key employees under Awards are not transferable other than to
immediate family members or by will or the laws of intestate succession.
The Trustee Share Plan authorizes the Board of Trustees, in its discretion,
to grant to eligible Trustees awards of the same types and terms of Awards as
provided under the Share Incentive Plan. Only Trustees who are not employees
of ACPP or any affiliated company are eligible to receive Awards under the
Trustee Share Plan. A total of 100,000 Shares will be reserved for issuance
under the Trustee Share Plan.
Since no Awards have been issued under these Plans, no liability has been
recorded in the accompanying combined historical statements of assets and
liabilities. However, ACPP may be required to recognize compensation expense
under APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
associated with Options and Rights issued to holders of IGC Options and
Rights. The primary factor that will determine the amount of compensation
expense ACPP may be required to recognize is ACPT's market price per share
subsequent to the Distribution. Whereas such information cannot be readily
determined, no compensation expense for Options and Rights issued to holders
of IGC Options and Rights has been recorded in the accompanying combined
historical statements of operations.
F-21
<PAGE>
AMERICAN COMMUNITY PORTFOLIO PROPERTIES
NOTES TO COMBINED HISTORICAL FINANCIAL STATEMENTS OF ASSETS
AND LIABILITIES TO BE TRANSFERRED TO
AMERICAN COMMUNITY PROPERTIES TRUST AND SUBSIDIARIES--(CONTINUED)
(11) INCOME TAXES
As a U.S. Company doing business in Puerto Rico, ACPP is subject to Puerto
Rico income tax on its Puerto Rico based income. The taxes reflected below are
a result of that liability.
The calculation below for the provision for income taxes does not include
the income from U.S. operations which is not subject to income taxes. It does
include the Puerto Rico source income which is subject to income taxes in
Puerto Rico at the statutory rate of 29%. The following table reconciles the
effective rate solely attributable to Puerto Rico source income:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1997 1996 1995
------------- ------------- -------------
% OF % OF % OF
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
------ ------ ------ ------ ------ ------
(IN THOUSANDS, EXCEPT AMOUNTS IN %)
<S> <C> <C> <C> <C> <C> <C>
Provision for income taxes at the
statutory income tax rate....... $470 29% $3,424 29% $1,369 29%
Reduction of provision for
partnership income not taxable
to Company...................... -- -- -- -- -- --
Other items...................... -- -- -- -- -- --
---- --- ------ --- ------ ---
$470 29% $3,424 29% $1,369 29%
==== === ====== === ====== ===
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Currently payable
United States.................................. $ -- $ -- $ --
Puerto Rico.................................... 1,390 3,005 723
Deferred......................................... (920) 419 646
-------- -------- --------
$ 470 $ 3,424 $ 1,369
======== ======== ========
</TABLE>
The components of deferred taxes payable include the following:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------
1997 1996
------- -------
<S> <C> <C>
Tax on amortization of deferred income related to long-
term receivables from partnerships operating in Puerto
Rico..................................................... $ 556 $ 499
Tax on equity in earnings of partnerships operating in
Puerto Rico.............................................. 1,232 2,337
Tax on land development costs capitalized for book pur-
poses but deducted currently for tax purposes............ 2,465 2,313
Tax on sale to related party deferred for book purposes
but currently taxable.................................... (133) (108)
------- -------
$4,120 $ 5,041
======= =======
</TABLE>
Deferred income taxes reflect the "temporary differences" between amounts of
assets and liabilities for financial reporting purposes as determined in
accordance with SFAS No. 109 and such amounts as measured by tax laws.
F-22
<PAGE>
AMERICAN COMMUNITY PORTFOLIO PROPERTIES
NOTES TO COMBINED HISTORICAL FINANCIAL STATEMENTS OF ASSETS
AND LIABILITIES TO BE TRANSFERRED TO
AMERICAN COMMUNITY PROPERTIES TRUST AND SUBSIDIARIES--(CONTINUED)
The reconciliation between net income per books and net taxable income is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996 1995
------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Net income per books.............................. $1,394 $12,695 $ 3,804
Built-in gain allocable to Predecessors:
Current......................................... (464) (3,526) (466)
Deferred........................................ (529) (415) (364)
Difference in income or losses from subsidiary
partnerships..................................... (429) (826) (20)
Capitalization of general and administrative
expenses under the Uniform Capitalization Rules.. 49 (246) 315
Differences in deferred income.................... 175 (1,431) 349
Difference in cost of sales due to interest re-
lated to the acquisition of land, deducted for
tax purposes..................................... 390 513 505
Deferred income taxes............................. (920) 419 646
Losses from restructuring......................... (225) (200) (61)
Other book to tax reconciling items, none of which
is individually significant...................... 3,526 (889) (1,269)
------ ------- -------
Net taxable income per federal return............. $2,967 $ 6,094 $ 3,439
====== ======= =======
</TABLE>
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, receivables and other
current assets approximate fair value due to the short-term nature of these
items. Fair value of long-term debt instruments was determined by discounting
future cash flows using ACPP's current market rates. As of December 31, 1997
and 1996, the fair value of long-term debt instruments was $78,307,000 and
$78,632,000, respectively.
(13) SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid and income taxes paid were as follows for the years ended
December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Interest paid........................................... $5,583 $7,004 $5,359
Income taxes paid....................................... $3,828 $ 371 $2,227
</TABLE>
Significant non-cash financing and investing activities included the
following:
(a) In 1996, ACPP received partnership interests from a Unitholder valued
at $69,000 in satisfaction of $69,000 of notes receivable.
(b) In 1995, ACPP received land in exchange for land sold with a $134,000
book value.
F-23
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Owners of American Community Properties Trust:
We have audited the accompanying balance sheet of American Community
Properties Trust (a Maryland trust) as of March 31, 1998. This financial
statement is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of American Community Properties
Trust as of March 31, 1998, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Washington, D.C.
June 26, 1998
F-24
<PAGE>
AMERICAN COMMUNITY PROPERTIES TRUST
BALANCE SHEET
AS OF MARCH 31, 1998
<TABLE>
<S> <C>
ASSETS
Total Assets............................................................. $ --
=====
LIABILITIES AND OWNERS' EQUITY
Owners' Equity
Common Stock $1 par value, 1,000 shares authorized No shares outstand-
ing................................................................... $ --
=====
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-25
<PAGE>
AMERICAN COMMUNITY PROPERTIES TRUST
NOTES TO BALANCE SHEET
MARCH 31, 1998
ORGANIZATION
On March 17, 1998, American Community Properties Trust ("ACPT") was formed
as a real estate investment trust under Article 8 of the Maryland Trust Law.
The trust is currently a wholly owned subsidiary of Interstate General Company
L.P. ("IGC"). The trust was formed to succeed to most of IGC's real estate
operations.
Under the proposed transaction IGC will transfer the principal real estate
operations and assets to ACPT and will distribute to the partners of IGC all
of the common shares of ACPT. Subject to market conditions, ACPT will seek to
raise up to $35 million in additional equity capital through a private
offering of preferred shares.
The trustees of ACPT are Edwin L. Kelly, J. Michael Wilson and Thomas B.
Wilson.
As of March 31, 1998, the trust had not commenced operations, and therefore
no statements of operations or cash flows have been presented. There has been
no activity since March 31, 1998.
F-26
<PAGE>
INTERSTATE GENERAL COMPANY L.P.
Proxy for Meeting of IGC Unitholders on August 31, 1998
This proxy is solicited on behalf of the Board of Directors of Interstate
General Management Corporation ("IGMC"), the managing general partner of
Interstate General Company L.P. ("IGC"), for the meeting of IGC Unitholders to
be held on August 31, 1998.
The undersigned hereby appoints Edwin L. Kelly and James J. Wilson, and each of
them, proxies with full power of substitution, to vote all IGC Units of the
undersigned at the meeting of IGC Unitholders to be held at 10:00 a.m. EDT,
August 31, 1998 at the Willard Intercontinental Hotel, The Taft Room, 1401
Pennsylvania Avenue, N.W., Washington, D.C., and any adjournment thereof, upon
the restructuring of IGC described in the proxy statement furnished herewith
(the "Restructuring"), and all subjects that may properly come before the
meeting, subject to any directions indicated on the reverse side of this card.
If no directions are given, the proxies will vote for the Restructuring, and at
their discretion on any other matter that may properly come before the meeting.
Please complete, sign, and date this proxy card and return it promptly in the
enclosed postage prepaid envelope or otherwise to P.O. Box 2637, Waldorf,
Maryland 20604.
<PAGE>
Please Mark the Appropriate Box with an "X":
[_] APPROVE OF THE PROPOSED RESTRUCTURING.
[_] DO NOT APPROVE OF THE PROPOSED RESTRUCTURING.
- ---------------------------------------- ---------------------
Name of Unitholder Number of Units Held
, 1998
- ---------------------------------------- ---------------------
Signature Date
- ----------------------------------
Title or Authority, if applicable
Note: If Units are registered in more than one name, the signatures of all such
persons are required. A corporation should sign in its full corporate
name by a duly authorized officer, giving his or her title. A partnership
should sign in the partnership name by an authorized person. Trustees,
guardians, executors and administrators should sign in their official
capacity, giving full title as such.
PLEASE COMPLETE, SIGN AND DATE THIS CARD AND RETURN IT PROMPTLY.
