##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 (Mark One)
    
    FORM 10-K
 þ      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2004 or o     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period
from            to Commission File Number: 000-49986 AMERICA FIRST APARTMENT INVESTORS, INC.  Maryland
    
    47-0858301(State or other jurisdiction
of incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 1004 Farnam Street, Suite 100 Omaha, Nebraska
    
    68102(Address of principal executive offices)
    
    (Zip Code)
 (402) 444-1630
(Registrants telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par Value Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES  þ
    
    NO  o
 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of the chapter) is not contained herein, and will not be contained, to
the best of the registrants knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). YES  þ
    
    NO  o
 The aggregate market value of the registrants common stock held by non-affiliates
based on the final sales price of the shares on the last business day of the registrants most
recently completed second fiscal quarter was $110,677,286. As of March 10, 2005, there were 10,510,558 outstanding shares of the registrants common
stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the
Companys Proxy Statement pertaining to its 2005 Annual
Shareholders Meeting are incorporated herein by reference into Part
III. i




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AMERICA FIRST APARTMENT INVESTORS, INC.

TABLE OF CONTENTS






PART I

Item 1.
    
    Business
    
    3Item 2.
    
    Properties
    
    9Item 3.
    
    Legal Proceedings
    
    11Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    11


PART II

Item 5.
    
    Market for Registrants Common Equity, Related Stockholder Mattersand Issuer Purchases of Equity Securities
    
    12Item 6.
    
    Selected Financial Data
    
    13Item 7.
    
    Management's Discussion and Analysis of Financial Condition andResults of Operations
    
    14Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    25Item 8.
    
    Financial Statements and Supplementary Data
    
    28Item 9.
    
    Changes in and Disagreements With Accountants on Accountingand Financial Disclosure
    
    28Item 9A.
    
    Controls and Procedures
    
    28Item 9B.
    
    Other Information
    
    32


PART III

Item 10.
    
    Directors and Executive Officers of the Registrant
    
    
    32Item 11.
    
    Executive Compensation
    
    
    33Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management
    
    
    33Item 13.
    
    Certain Relationships and Related Transactions
    
    
    33Item 14.
    
    Principal Accounting Fees and Services
    
    
    33


PART IV

Item 15.
    
    Exhibits, Financial Statement Schedules
    
    
    33


SIGNATURES
    
    
    68Asset Purchase AgreementSubsidiariesIndependent Registered Public Accounting Firm's ConsentIndependent Registered Public Accounting Firm's ConsentPowers of AttorneyCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906




ii



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##### Table of Contents



PART I 
 Item 1. Business. America First Apartment Investors, Inc. (the Company) was formed on March 29, 2002 under the
Maryland General Corporation Law and is taxed as a real estate investment trust (REIT) for
Federal income tax purposes. The Company is the successor to America First Apartment Investors,
L.P. (the Partnership) which merged with the Company as of January 1, 2003. As a result of this
merger, the Company assumed the assets, liabilities and business operations of the Partnership. The
Company had no material assets or operations prior to its merger with the Partnership. Accordingly,
any operations or financial results of the Company described herein for periods prior to January 1,
2003 are those of the Partnership. On June 3, 2004, the Company merged with America First Real Estate Investment Partners, L.P.
(AFREZ). As a result of the merger, AFREZ was merged with and into the Company. The Company was
the surviving entity and assumed all of the assets, liabilities and business operations of AFREZ,
including 14 multifamily apartment properties containing 2,783 rental units located in Arizona,
Florida, Illinois, Michigan, North Carolina, Ohio, Tennessee and Virginia. Operating and Investment Strategy The Companys operating and investment strategy primarily focuses on multifamily apartment
properties as long-term investments. The Companys operating goal is to generate increasing amounts
of net rental income from these properties that will allow it to increase dividends paid on its
common stock. In order to achieve this goal, management of these multifamily apartment properties
is focused on: (i) maintaining high economic occupancy and increasing rental rates through
effective leasing, reduced turnover rates and providing quality maintenance and services to
maximize resident satisfaction; (ii) managing operating expenses and achieving cost reductions
through operating efficiencies and economies of scale generally inherent in the management of a
portfolio of multiple properties ; (iii) emphasizing regular programs of repairs, maintenance and
property improvements to enhance the competitive advantage and value of its properties in their
respective market areas; and (iv) continuing its program of selective property acquisitions and
dispositions to increase the value and cash flow potential of its portfolio. As of December 31,
2004, the Company owned 29 multifamily apartment properties containing a total of 6,307 rental
units and a 72,002 square foot office/warehouse facility. The Companys multifamily apartment
properties are located in the states of Florida, Tennessee, Georgia, Oklahoma, Arizona, California,
Michigan, North Carolina, Ohio, Virginia and Illinois. The Company focuses its acquisition efforts
on established multifamily apartment properties located throughout the United States. In
particular, the Company seeks out properties that it believes have the potential for increased
revenues through more effective management. In connection with each potential property acquisition,
the Company reviews many factors, including the following: (i) the location of the property; (ii)
the construction quality, condition and design of the property; (iii) the current and projected
cash flow generated by the property and the potential to increase cash flow through more effective
management; (iv) the potential for capital appreciation of the property; (v) the potential for
rental rate increases; (vi) the economic situation in the community in which the property is
located and the potential changes thereto; (vii) the occupancy and rental rates at competing
properties; and (viii) the potential for liquidity through financing or refinancing of the property
or the ultimate sale of the property. The Company does not have any limitations on the percentage
of its assets which may be invested in any one property or on the number of properties that it may
own in any particular geographic market. The Company may also invest in other types of real estate assets including: (i) Agency Securities issued or guaranteed as to the payment of principal or interest
by an agency of the U.S. government or a federally-chartered corporation such as the Federal
National Mortgage 3




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Association (FNMA), Government National Mortgage Association (GNMA) or
the Federal Home Loan Mortgage Corporation (FHLMC) (Agency Securities). Agency Securities
acquired by the Company are secured by pools of first mortgage loans on single-family
residences. Agency Securities held by the Company bear interest at an adjustable interest
rate or at a fixed rate for an initial period of time (typically one to three years) and then
convert to a one-year adjustable rate for the remaining loan term. As of December 31, 2004,
the Company had Agency Securities with a fair market value of approximately $26.2 million. (ii) Mezzanine-level financing provided to developers of residential real estate which
can take a variety of forms including subordinated mortgage loans and preferred equity
investments. These mezzanine level investments will generally be structured to provide the
Company with a minimum return by way of a fixed base rate of interest or preferred dividend
as well as the opportunity to participate in the excess cash flow and sales proceeds of the
underlying apartment property through the payment of participating interest and additional
dividends. As of December 31, 2004, the Company did not have any investments of this type. (iii) Equity investments in other REITs and similar real estate companies, which can
include publicly-traded common and preferred stocks. The Company may also acquire controlling
and non-controlling interests in other real estate businesses such as property management
companies. As of December 31, 2004, the Company had investments of this type with a fair
market value of approximately $4.3 million. By including investments in Agency Securities, mezzanine-level financing of residential real
estate, and investments in other real estate companies, the Company seeks to supplement and
stabilize its cash flow by investing in assets that are less affected by the variables that affect
the cash flow generated by investments in apartments. In addition, investments in Agency Securities
allow the Company to quickly invest the proceeds from the sale of additional stock or from the sale
of any of its real property investments at potentially higher returns than traditional money market
investments. The overall mix of these various types of investments will vary from time to time as
the Company seeks to take advantage of opportunities in the real estate industry. In general,
however, it is anticipated that at least 80% of the Companys equity capital will be invested in
multifamily apartment properties. As of December 31, 2004, approximately 81% of the Companys
equity capital was invested in multifamily apartment properties. All investments made by the Company must be made in compliance with applicable requirements for
maintaining its status as a REIT for Federal income tax purposes. As a REIT, the Company is
generally not subject to Federal income taxes on distributed income. To maintain qualification as a
REIT, the Company must meet a number of organizational and operational requirements, including a
requirement to distribute at least 90% of the REITs ordinary taxable income to shareholders. It is
the Companys current intention to adhere to these requirements and maintain its REIT status. Financing Strategies The Company has the authority to finance the acquisition of additional real estate in a variety of
manners, including borrowings in the form of taxable or tax-exempt mortgage loans secured by the
acquired properties and borrowing against existing unencumbered assets, including the use of
repurchase agreements collateralized by its Agency Securities. In addition, the Company may sell
existing properties and reinvest the net proceeds from a sale in additional properties. As of December 31, 2004, the Company had net debt obligations under twenty financing arrangements
with an aggregate principal balance of approximately $167.2 million, all of which is secured by
mortgages on its properties. In addition, the Company has approximately $20.9 million of borrowings
under repurchase agreements which are collateralized by Agency Securities secured by first
mortgages on multifamily properties 4




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and single family properties. Approximately $7.0 million of
borrowings under repurchase agreements are secured by the underlying property value of The Ponds at
Georgetown. The Company does not have any limitations on the number or amount of mortgages which
may be placed on any one property. In addition, the Company has the authority to raise additional equity capital through the issuance
of additional shares. If the Company decides to sell shares, it may do so in a number of different
manners, including a rights offering directly to existing shareholders, an underwritten public
offering or in a private placement negotiated with a small number of investors. The Company may
also issue shares to the owners of multifamily apartment properties that it acquires as full or
partial payment for those properties. In June 2004, the Company filed a Form S-3 registration
statement for $200 million of any combination of common stock and preferred stock in one or more
offerings which may be sold from time to time in order to raise additional equity capital in order
to support the Companys business strategy. To date, no securities have been sold under this
registration statement. AFREZ Merger On May 26, 2004, the shareholders of the Company approved a merger with AFREZ, pursuant to the
Agreement and Plan of Merger entered into by the Company and AFREZ on November 25, 2003 (the
Merger Agreement). The merger became effective on June 3, 2004. The Company issued shares of its common stock and paid cash to the holders of the limited partner
and general partner interests in AFREZ upon consummation of the merger. Each Unit representing an
assigned limited partnership interest in AFREZ as of the date of the merger was converted into the
right to receive 0.7910 shares of the common stock of the Company and a cash payment of $0.39 per
Unit. Fractional shares were rounded up or down to the nearest whole number. A total of 5,376,353
shares of the common stock of the Company were issued to Unit holders in connection with the merger
plus a cash payment of $2.7 million. The general partners 1% interest in AFREZ was converted into
54,308 shares of the common stock of the Company plus a cash payment of approximately $27,000. The
general partner was an affiliate of the Companys Advisor. Both the general partner of AFREZ and the Board of Directors of the Company determined that the
merger would provide investors in both AFREZ and the Company with a number of benefits, including:  
    a greater ability to acquire additional apartment complexes, Agency Securities and
other residential real estate resulting in enhanced access to capital;
    a reduction in investment risks due to a larger and more diversified portfolio of investment assets;
    a more stable and liquid market for the Companys shares;
    lower overall operating costs due to elimination of duplicative expense and other
economies of scale;
    simplified income tax reporting for investors in AFREZ. In addition, special committees made up of the independent directors of the general partner of
AFREZ and of the independent directors of the Company negotiated the terms of the merger and
concluded that the terms were fair to the limited partners of AFREZ and the shareholders of the
Company. Each of the special committees was advised by their own independent investment banking
firm regarding the fairness of the terms of the merger. Acquisition of certain property management assets On November 8, 2004, America First PM Group, Inc., (PM Group) a wholly-owned subsidiary of the
Company, acquired certain property management assets, rights to use certain proprietary systems,
certain 5




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property management agreements, certain employment agreements and other intangible assets
from America First Properties Management Companies, L.L.C. (America First Properties) and its
parent, America First Companies, L.L.C. (America First Companies) (the Property Management
acquisition). Prior to this transaction, America First Properties managed each of the multi-family
apartment complexes owned by the Company. As a result of this transaction, the management of all of
the Companys properties and certain other properties owned by unaffiliated parties was
internalized, allowing the Company to cease paying third-party property management fees. The
internalization of the property management function is expected to be accretive to earnings
beginning in 2005. The purchase price for the acquired assets was $6.8 million, plus estimated transaction costs of
approximately $172,000. A Special Committee of the Board of Directors of the Company (Special
Committee), comprised solely of independent directors of the Company, negotiated the terms and
conditions of the transaction on behalf of the Company. The Special Committee retained an
independent investment banking firm to render an opinion to the Company as to the fairness to the
Company of the consideration paid for the acquired assets. Executive and Administrative Advisory Services The Company has an Advisory Agreement (the Agreement) with America First Apartment Advisory
Corporation (the Advisor) in which the Advisor provides external executive and administrative
services under the supervision of the Companys Board of Directors. The Advisor also acts as a
consultant with respect to investment and policy decisions. The Company pays an administrative fee equal to 0.55% per annum of the sum of: (i) the original
principal amount of the bonds originally issued to the predecessor to the Partnership; (ii) the
purchase price paid by the Company for new assets that are then held by the Company; (iii) the
outstanding principal of mezzanine financing provided by the Company to unaffiliated developers of
residential real estate, plus (iv) the fair value of the AFREZ properties on the date of the merger to
the Advisor for the services it provides under the Agreement. The Advisor may also receive a
separate fee in connection with the identification, evaluation and acquisition of real estate
assets that the Company acquires. The acquisition fee is equal to 1.25% of the gross purchase price
paid for such real estate assets. The Advisor also earns an administrative fee of 0.25% per annum
of the outstanding principal balance of all Agency Securities held by the Company with an incentive
equal to 20% of the amount by which the total net interest income realized by the Company from its
portfolio of Agency Securities during each calendar month exceeds the average dollar amount of
stockholders equity invested in Agency Securities during the month times the composite dividend
yield reported by the National Association of Real Estate Investment Trusts (NAREIT) for equity
REITs which invest in residential apartment properties. The Advisor has retained an unaffiliated
sub-advisor to advise it with respect to the Companys investments in Agency Securities. All fees
paid to this sub-advisor are paid by the Advisor and none are paid by the Company. The Company will
also reimburse the Advisor and its affiliates for certain out-of-pocket expenses that it incurs in
connection with the carrying out of the Companys business activities. Competition In each city where the Companys properties are located, the properties compete with a substantial
number of other multifamily properties. Multifamily properties also compete with single-family
housing that is either owned or leased by potential tenants. To compete effectively, the Company
must offer quality apartments at competitive rental rates. In order to maintain occupancy rates and
attract quality tenants, the Company may also
offer rental concessions, such as free rent to new tenants for a stated period. The Company also
competes by offering quality apartments in attractive locations and providing tenants with
amenities such as recreational facilities, garages and pleasant landscaping. The Company also
emphasizes maintenance and property physical condition. 6




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Environmental Matters The Company believes that each of its properties is in compliance, in all material respects, with
federal, state and local regulations regarding hazardous waste and other environmental matters and
is not aware of any environmental contamination at any of its properties that would require any
material capital expenditure by the Company for the remediation thereof. Risk Factors The financial condition and results of operations of the Company and its ability to pay dividends
are affected by various factors, many of which are beyond the Companys control. These include the
following: The Companys financial results are substantially dependent upon the performance of its multifamily
housing. The performance of the Companys multifamily housing is affected by a number of factors including:  
    general and local economic conditions
    the relative supply of apartments and other homes in the market area
    interest rates on single family mortgages and the effect on the affordability of
home buying. If interest rates on single-family mortgages maintain current levels or
decline further, it could further increase home buying and continue to reduce the
number of quality tenants available.
    the need for and costs of repairs and maintenance of the properties
    government regulations and the cost of complying with them
    property tax rates imposed by local taxing authorities
    utility rates and property insurance rates. As a result of any or all of the above factors, the Companys financial results, the amount of
cash available for distribution to the Companys shareholders and the market price of the
Companys common stock could decline. The Company is not completely insured against damages from hurricanes and other major storms. The Company currently owns several apartment complexes and other properties that are in areas
that are prone to damage from hurricanes and other major storms, including seven apartment
complexes and one commercial property located in Florida. Due to the significant losses
incurred by insurance companies on policies written on properties in Florida damaged by
hurricanes, property and casualty insurers in Florida have modified their approach to
underwriting policies. As a result, the Company now assumes the risk of first loss on a larger
percentage of the value of its Florida real estate. If any of these properties were damaged in
a hurricane or other major storm, the losses incurred by the Company could be significant. The
Companys current policies carry a 3% deductible on the insurable value of the properties. The
current insurable value of the Florida properties is approximately $51.3 million. The Company is subject to the risk normally associated with debt financing. The Company finances its real estate investments with mortgage debt, subjecting the Company to
the risk that cash flow may not be sufficient to meet required payments of principal and
interest on its debt. In addition, the existing terms of certain of the Companys bonds and
mortgages payable require that only a small portion of the principal of its debt will be repaid
prior to maturity. Therefore, the Company is likely to need to refinance at least a portion of
the outstanding debt as it matures if it intends to continue owning the property. There is a
risk that the terms of the refinancing will not be as favorable as the existing debt. The 7




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Companys ability to pay dividends to its shareholders is subordinated to the payment of debt
service on its debt and other borrowings. Real estate financed with tax-exempt debt is subject to certain restrictions. The Company has and may in the future use tax-exempt financing to finance the acquisition of
multifamily properties. While this type of financing generally offers lower interest rates than
conventional financing, it subjects the financed property to certain restrictive covenants,
including a requirement that a percentage of the apartment units in each property be occupied by
residents whose income does not exceed a percentage of the median income for the area in which
the property is located. It is possible that such covenants may cause the rents charged by these
properties to be lowered, or rent increases foregone, in order to attract enough residents
meeting the income requirements. In the event the Company does not comply with these
restrictions, the interest on the bonds could become subject to Federal and state income tax,
which would result in either an increase in the interest rate on the bonds or an early
redemption of these bonds that would force the Company to obtain alternative financing or sell
the property financed by the bond. Fluctuating interest rates may affect the Companys earnings. The Companys variable rate bonds payable bear interest at short-term variable rates. The
short-term rate on the variable rate bonds payable is an index rate which is reset weekly.
Increases in the short-term interest rates would increase interest expense on such borrowings. The Companys borrowings under repurchase agreements all bear interest at short-term fixed
rates. An increase in market interest rates would cause the interest rates of the obligations to
increase when and if they are renewed upon maturity. If interest rates increase, the Company will have to pay more interest on this debt, but would
not necessarily be able to increase rental income from its multifamily apartment properties.
Therefore, an increase in interest rates may reduce the Companys earnings and this may reduce
the amount of funds available for distribution to the Companys shareholders and the market
price of its common stock. The Companys multifamily apartment properties may be illiquid and their value may decrease. The Companys investments in multifamily apartment properties are relatively illiquid. The
ability to sell these assets, and the price received upon sale are affected by a number of
factors including the number of potential and interested buyers, the number of competing
properties on the market in the area and a number of other market conditions. As a result, the
Company may not be able to recover its original purchase price upon sale. The Company is subject to risks associated with its investments in Agency Securities that differ
from those involved with owning multifamily apartment properties. Prepayments are the primary feature of Agency Securities that distinguishes them from other
types of fixed income investments and can occur when a homeowner sells or refinances his home.
Prepayments usually
can be expected to increase when mortgage interest rates decrease significantly and decrease
when mortgage interest rates increase, although such effects are not entirely predictable. While
a certain percentage of the pool of mortgage loans underlying Agency Securities are expected to
prepay during a given period of time, the prepayment rate can, and often does, vary
significantly from the anticipated rate of prepayment. Prepayments generally have a negative
impact on the Companys financial results, the effects of which depends on, among other things,
the amount of unamortized premium on the securities, the reinvestment lag and the reinvestment
opportunities. 8




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The Companys financing strategy for its portfolio of Agency Securities uses a leverage rate of
approximately eight times equity capital and by borrowing against a substantial portion of the
market value of its Agency Securities in the form of repurchase agreements. If interest income
on the Agency Securities purchased with borrowed funds fails to cover the cost of the
borrowings, the Company will experience net interest losses and may experience net losses from
operations. The return earned by the Company on its Agency Securities may be reduced if the
interest rates on the underlying mortgage loans do not adjust as quickly or as much as necessary
in order to match interest rate increases that may occur on the borrowings used by the Company
to finance Agency Securities. In addition, fluctuations in the market value of the Agency
Securities may result from changing interest rates. Accordingly, investments made by the Company
in Agency Securities may result in lower earnings per share or losses and, as a result, could
reduce the amount of cash available for distribution to stockholders. There are risks associated with making mezzanine investments that differ from those involved with
owning multifamily apartment properties. In general, mezzanine level financing provided by the Company will be subordinate to senior
lenders on the financed properties. Accordingly, in the event of a default on investments of
this type, senior lenders will have a first right to the proceeds from the sale of the property
securing their loan and this may result in the Company receiving less than all principal and
interest it is owned on its mezzanine level financing. Also, since mezzanine level financings
are expected to participate in the cash flow or sale proceeds from a financed property, they may
carry a base interest rate different than a non-participating financing. The issuance of additional shares of stock by the Company could cause the price of its stock to
decline. The Company has the authority to issue additional equity. These may be shares of common stock or
shares of one or more classes of preferred stock. Shares of preferred stock, if any, would have
rights and privileges different from the Companys common stock, which may include preferential
rights to receive dividends. The issuance of additional common stock or other forms of equity
could cause dilution of the existing shares of common stock and a decrease in the market price
of the common stock. There are a number of risks associated with being taxed as a REIT. In order to maintain its status as a REIT, the Company must comply with a number of
requirements. Furthermore, Congress and the IRS could make changes to the tax laws and
regulations and the courts might issue new rulings that would make it impossible or difficult
for the Company to remain qualified as a REIT. If the Company fails to qualify as a REIT, its
net income would be subject to Federal income tax at regular corporate rates. Information Available on Website The Companys annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K and press releases are available free of charge at www.apro-reit.com as soon as reasonably
practical after they are filed with the Securities and Exchange Commission (SEC). 
 Item 2. Properties. Properties owned by the Company as of December 31, 2004 are described in the following table: 9




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Average
    
    Number
    
    
    PercentageNumber
    
    
    Square Feet
    
    of Units
    
    
    of Units
    
    EconomicProperty Name
    
    Location
    
    of Units
    
    
    Per Unit
    
    Occupied
    
    
    Occupied
    
    Occupancy (2)Arbor Hills
    
    Antioch, TN
    
    
    548
    
    
    827
    
    
    495
    
    
    90%
    
    N/ABelvedere Apartments
    
    Naples, FL
    
    
    162
    
    
    829
    
    
    157
    
    
    97%
    
    91%Bluff Ridge Apartments
    
    Jacksonville, NC
    
    
    108
    
    
    873
    
    
    107
    
    
    99%
    
    97%Brentwood Oaks Apartments
    
    Nashville, TN
    
    
    262
    
    
    852
    
    
    255
    
    
    97%
    
    85%Coral Point Apartments
    
    Mesa, AZ
    
    
    337
    
    
    780
    
    
    294
    
    
    87%
    
    68%Covey at Fox Valley
    
    Aurora, IL
    
    
    216
    
    
    948
    
    
    191
    
    
    88%
    
    74%Delta Crossing
    
    Charlotte, NC
    
    
    178
    

    
    880
    
    
    163
    
    
    92%
    
    64%Elliots Crossing Apartments
    
    Tempe, AZ
    
    
    247
    
    
    717
    
    
    208
    
    
    84%
    
    72%Fox Hollow Apartments
    
    High Point, NC
    
    
    184
    
    
    877
    
    
    163
    
    
    89%
    
    72%Greenbriar Apartments
    
    Tulsa, OK
    
    
    120
    
    
    666
    
    
    113
    
    
    94%
    
    82%Highland Park Apartments
    
    Columbus, OH
    
    
    252
    
    
    891
    
    
    234
    
    
    93%
    
    82%The Hunt Apartments
    
    Oklahoma City, OK
    
    
    216
    
    
    693
    
    
    201
    
    
    93%
    
    90%Huntsview Apartments
    
    Greensboro, NC
    
    
    240
    
    
    875
    
    
    210
    
    
    88%
    
    74%Jackson Park Place Apartments
    
    Fresno, CA
    
    
    296
    
    
    822
    
    
    285
    
    
    96%
    
    93%Lakes of Northdale Apartments
    
    Tampa, FL
    
    
    216
    
    
    873
    
    
    202
    
    
    94%
    
    84%Littlestone of Village Green
    
    Gallatin, TN
    
    
    200
    
    
    987
    
    
    185
    
    
    93%
    
    80%Misty Springs Apartments
    
    Daytona Beach, FL
    
    
    128
    
    
    786
    
    
    127
    
    
    99%
    
    93%Monticello Apartments
    
    Southfield, MI
    
    
    106
    
    
    1027
    
    
    99
    
    
    93%
    
    82%Oakhurst Apartments
    
    Ocala, FL
    
    
    214
    
    
    790
    
    
    204
    
    
    95%
    
    91%Oakwell Farms Apartments
    
    Nashville, TN
    
    
    414
    
    
    800
    
    
    389
    
    
    94%
    
    75%Park at Countryside
    
    Port Orange, FL
    
    
    120
    
    
    720
    
    
    113
    
    
    94%
    
    88%The Park at 58 Apartments
    
    Chattanooga, TN
    
    
    196
    
    
    876
    
    
    159
    
    
    81%
    
    75%Park Trace Apartments
    
    Norcross, GA
    
    
    260
    
    
    806
    
    
    245
    
    
    94%
    
    73%The Ponds at Georgetown
    
    Ann Arbor, MI
    
    
    134
    
    
    1002
    
    
    120
    
    
    90%
    
    76%The Retreat
    
    Atlanta, GA
    
    
    226
    
    
    855
    
    
    211
    
    
    93%
    
    66%St. Andrews at Westwood Apts
    
    Orlando, FL
    
    
    259
    
    
    836
    
    
    253
    
    
    98%
    
    83%Shelby Heights
    
    Bristol, TN
    
    
    100
    
    
    980
    
    
    94
    
    

    94%
    
    92%Watermans Crossing
    
    Newport News, VA
    
    
    260
    
    
    944
    
    
    255
    
    
    98%
    
    93%Waters Edge Apartments
    
    Lake Villa, IL
    
    
    108
    
    
    814
    
    
    98
    
    
    91%
    
    75%6,307
    
    
    
    
    
    5,830
    
    
    92%
    
    81%The Exchange at Palm Bay
    
    Palm Bay, FL
    
    
    72,002
    (1)
    
    
    
    
    63,692
    
    
    88%
    
    NA
   (1)
    
    This is an office/warehouse facility. The figure represents square feet available for lease to tenants and percentage of square feet occupied.(2)
    
    Economic occupancy is presented for the year ended December 31, 2004. Economic occupancy is defined as the net rental income divided by the
maximum amount of rental income which could be derived from each property. The statistic is reflective of vacancy, rental concessions,
delinquent rents, bad debt and non-revenue units such as model units and employee units. For those properties acquired as part of the AFREZ
merger, economic occupancy is presented for the period of ownership, June 3, 2004 through December 31, 2004. Because Arbor Hills was not
acquired until December 22, 2004, no economic occupancy data has been presented for 2004. In the opinion of the Companys management, each of the properties is adequately covered by
insurance. For additional information concerning the properties, see Note 6 to the Companys
consolidated financial statements. A discussion of general competitive conditions to which these
properties are subject is included in Item 1 of this report. 10




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##### Table of Contents



On December 22, 2004, the Company acquired all of the outstanding membership interests in a newly
formed Tennessee limited liability company, Arbor Knoll-Crest, LLC from Gables Realty Limited
Partnership, a Delaware limited partnership and Gables GP, Inc., a Texas corporation. The sole
asset of Arbor Knoll-Crest, LLC is a 548-unit apartment complex in Antioch, Tennessee, which was
renamed Arbor Hills. The purchase price for the membership interests in Arbor Knoll-Crest, LLC was approximately $29.7
million, $26.2 million of which was paid through the assumption of existing tax-exempt mortgage
debt on the Property, approximately $3.0 million of which was paid in cash, and approximately
$550,000 of which was paid through various expense prorations. On December 15, 2004, the Company sold the property commonly referred to as The Glades
Apartments. The total sales price of $20.0 million consisted of cash and debt assumed by the
buyer. The net cash proceeds to the Company were $11.1 million, net of closing costs of
approximately $149,000. The total debt assumed by the buyer was approximately $8.8 million. A
gain of approximately $6.0 million was realized upon the closing of the transaction. 
 Item 3. Legal Proceedings. On December 3, 2003, a purported class action lawsuit was filed in the Delaware Court of Chancery
against AFREZ, along with its general partner and America First Companies L.L.C. (America First),
by Harvey Matcovsky and Gloria Rein, in their capacities as holders of assigned limited partner
interests (Units) of AFREZ. The plaintiffs seek to have the lawsuit certified as a class action
on behalf of all Units holders. The lawsuit alleges, among other things, that the defendants acted
in violation of their fiduciary duties to the Unit holders in connection with the merger of AFREZ
with and into the Company. The plaintiffs were seeking to enjoin the proposed merger and also seek
unspecified damages and costs. On February 5, 2004, the defendants filed an Answer denying all
material allegations and asserting several affirmative defenses. The merger of AFREZ with and into
the Company was completed on June 3, 2004 and, as a result, the Company assumed all liabilities of
AFREZ, including any liability that may be imposed as a result of this lawsuit. To date, the
plaintiffs have not amended their complaint to formally name the Company as a defendant or to
modify the relief they are seeking. The Company intends to defend this lawsuit vigorously, but is
unable to predict the outcome of this litigation. There are no other material pending legal
proceedings to which the Company is a party or to which any of its properties is subject 
 Item 4. Submission of Matters to a Vote of Security Holders. No matter was submitted during the fourth quarter of the fiscal year ended December 31, 2004 to a
vote of the Companys security holders. 11




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##### Table of Contents



PART II 
 Item 5. Market for the Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities. (a) Market Information. Shares of the Company trade on the NASDAQ National Market System under
the trading symbol APRO. The following table sets forth the high and low sale prices for the
shares for each quarterly period in 2004 and 2003. 2004
    
    High
    
    
    Low1st Quarter
    
    $
    12.48
    
    
    $
    10.582nd Quarter
    
    $
    11.47
    
    
    $
    10.003rd Quarter
    
    $
    11.96
    
    
    $
    10.004th Quarter
    
    $
    12.65
    
    
    $
    11.20
 2003
    
    High
    
    
    Low1st Quarter
    
    $
    9.62
    
    
    $
    8.272nd Quarter
    
    $
    10.80
    
    
    $
    8.203rd Quarter
    
    $
    10.88
    
    
    $
    9.924th Quarter
    
    $
    12.20
    
    
    $
    9.77
  (b)
    Shareholders. The approximate number of shareholders on March 4, 2005 was 9,890.(c)
    Dividends. Dividends to shareholders were made on a quarterly basis during 2004 and 2003.
Total dividends declared to shareholders during the fiscal years ended December 31, 2004 and
2003 equaled $9,149,143 and $5,074,649, respectively. The dividends accrued per share during
the fiscal years ended December 31, 2004 and 2003 were as follows: 2004
    
    
    2003Dividends
    
    $
    1.0000
    
    
    $
    1.0000
 See Item 7, Managements Discussion and Analysis of Financial Condition and Results of
Operations, for information regarding the sources of funds that will be used for cash dividends
and for a discussion of factors which may affect the Companys ability to pay cash dividends at the
same levels in 2005 and thereafter. 12




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##### Table of Contents



Item 6. Selected Financial Data. Set forth below is selected financial data for the Company for the five years ended December 31,
2004. Information for periods prior to January 1, 2003 represents the financial data of the
Partnership. Information for the periods beginning June 3, 2004 include the financial information
of AFREZ which merged with the Company as of that date. The information should be read in
conjunction with the Companys consolidated financial statements and Notes thereto filed in
response to Item 8 of this report. For the
    
    
    For the
    
    
    For the
    
    
    For the
    
    
    For theYear Ended
    
    
    Year Ended
    
    
    Year Ended
    
    
    Year Ended
    
    
    Year Ended(in thousands, except per share amounts)
    
    Dec. 31, 2004
    
    
    Dec. 31, 2003
    
    
    Dec. 31, 2002
    
    
    Dec. 31, 2001
    
    
    Dec. 31, 2000Rental income
    
    $
    35,319
    
    
    $
    24,123
    
    
    $
    24,862
    
    
    $
    25,410
    
    
    $
    22,458Real estate operating expenses
    
    
    (19,879
    )
    
    
    (13,022
    )
    
    
    (12,867
    )
    
    
    (12,131
    )
    
    
    (10,724
    )Depreciation expense
    
    
    (6,891
    )
    
    
    (5,001
    )
    
    
    (4,964
    )
    
    
    (4,938
    )
    
    
    (4,349
    )Interest income on cash and cash equivalents and
agency securities and dividend income
    
    
    770
    
    
    
    331
    
    
    
    317
    
    
    
    607
    
    
    
    1,133Gain on Jefferson Place subordinate note
    
    
    
    
    
    
    4,444
    
    
    
    
    
    
    
    
    
    
    
    Gain on sales of corporate equity securities
    
    
    212
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest expense
    
    
    (5,699
    )
    
    
    (4,316
    )
    
    
    (4,324
    )
    
    
    (4,463
    )
    
    
    (4,037
    )General and administrative expenses
    
    
    (3,997
    )
    
    
    (1,910
    )
    
    
    (1,773
    )
    
    
    (1,726
    )
    
    
    (1,619
    )Amortization expense  in-place lease intangibles
    
    
    (2,466
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization expense  debt financing costs
    
    
    (253
    )
    
    
    (288
    )
    
    
    (261
    )
    
    
    (271
    )
    
    
    (256
    )Property management internalization expense
    
    
    (5,911
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income (loss) from continuing operations
    
    
    (8,795
    )
    
    
    4,361
    
    
    
    990
    
    
    
    2,488
    
    
    
    2,606Income from discontinued operations, (including
gain on sale of $5,973)
    
    
    6,030
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    (2,765
    )
    
    $
    4,361
    
    
    $
    990
    
    
    $
    2,488
    
    
    $
    2,606Income (loss) from continuing operations, basic
and diluted, per share or BUC (beneficial unit certificate)
    
    $
    (1.07
    )
    
    $
    0.86
    
    
    $
    0.19
    
    
    $
    0.48
    
    
    $
    0.50Income from discontinued operations, basic
and diluted, per share (BUC)
    
    $
    0.73
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Income (loss), basic and diluted, per share (BUC)
    
    $
    (0.34
    )
    
    $
    0.86
    
    
    $
    0.19
    
    
    $
    0.48
    
    
    $
    0.50Dividends (distributions) declared and paid
per share (BUC)
    
    $
    1.00
    
    
    $
    1.00
    
    
    $
    1.00
    
    
    $
    0.95
    
    
    $
    0.90Investments in real estate, net of accumulated
depreciation
    
    $
    240,501
    
    
    $
    114,898
    
    
    $
    119,491
    
    
    $
    123,792
    
    
    $
    128,343Total assets
    
    $
    297,397
    
    
    $
    166,892
    
    
    $
    136,854
    
    
    $
    141,552
    
    
    $
    144,804Bonds and mortgage notes payable
    
    $
    167,150
    
    
    $
    82,215
    

    
    $
    82,913
    
    
    $
    83,570
    
    
    $
    84,187Borrowings under repurchase agreements
    
    $
    27,875
    
    
    $
    33,012
    
    
    $
    
    
    
    $
    
    
    
    $
    Cash flows from operating activities
    
    $
    8,505
    
    
    $
    5,227
    
    
    $
    5,279
    
    
    $
    6,884
    
    
    $
    9,701Cash flows from investing activities
    
    $
    16,113
    
    
    $
    (33,980
    )
    
    $
    (2,141
    )
    
    $
    (587
    )
    
    $
    (19,096
    )Cash flows from financing activities
    
    $
    (20,902
    )
    
    $
    27,251
    
    
    $
    (5,666
    )
    
    $
    (5,482
    )
    
    $
    9,268Funds from Operations (1)
    
    $
    1,181
    
    
    $
    9,362
    
    
    $
    5,954
    
    
    $
    7,426
    
    
    $
    6,955
 (1) FFO is calculated in accordance with the definition of FFO that is recommended by the
National Association of Real Investment Trusts (NAREIT). To calculate FFO under the NAREIT
definition, depreciation and amortization expenses related to the Companys real estate, gains or
losses realized from the disposition of depreciable real estate assets, and certain extraordinary
items are added back to the Companys net income. The Company believes that FFO more appropriately
reflects the Companys operating performance because FFO excludes the depreciation expense
on real estate assets and real estate generally appreciates over time or maintains residual value
to a much greater extent than other depreciable assets such as machinery or equipment.
Additionally, other real estate companies, analysts and investors utilize FFO in analyzing the
results of real estate companies. While the Company uses the NAREIT definition of FFO, the Companys FFO may not be comparable to
other REITs or real estate companies with similar assets. This is due in part to the differences in
capitalization policies used by different companies and the significant effect these capitalization
policies have on FFO. Real estate costs incurred in connection with real estate operations which
are accounted for as capital improvements are added 13




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##### Table of Contents



to the carrying value of the property and
depreciated over time whereas real estate costs that are expensed are accounted for as a current
period expense. This affects FFO because costs that are accounted for as expenses reduce FFO.
Conversely, real estate costs that are capitalized and depreciated are added back to net income to
calculate FFO. During the periods reported above, the Companys capitalization policy was to treat
most recurring capital improvements, such as appliances, vinyl flooring and carpet as expenses, and
this may cause the Companys reported FFO to be lower than peer companies that capitalize recurring
improvements of these types. Although the Company considers FFO to be a useful measure of its operating performance, FFO should
not be considered as an alternative to net income or net cash flows from operating activities which
are calculated in accordance with GAAP. The following sets forth a reconciliation of the Companys net income as determined in
accordance with GAAP and its FFO for the periods set forth (in thousands): For the
    
    
    For the
    
    
    For the
    
    
    For the
    
    
    For theYear Ended
    
    
    Year Ended
    
    
    Year Ended
    
    
    Year Ended
    
    
    Year EndedDec. 31, 2004
    
    
    Dec. 31, 2003
    
    
    Dec. 31, 2002
    
    
    Dec. 31, 2001
    
    
    Dec. 31, 2000Net income (loss)
    
    $
    (2,765
    )
    
    $
    4,361
    
    
    $
    990
    
    
    $
    2,488
    
    
    $
    2,606Depreciation expense
    
    
    7,122
    (1)
    
    
    5,001
    
    
    
    4,964
    
    
    
    4,938
    
    
    
    4,349Amortization of in-place lease intangibles
    
    
    2,797
    (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gain on sale of discontinued operations
    
    
    (5,973
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Funds From Operations
    
    $
    1,181
    
    
    $
    9,362
    
    
    $
    5,954
    
    
    $
    7,426
    
    
    $
    6,955
   (1)
    
    Depreciation includes $231,000 and amortization of in-place lease intangibles includes $331,000 related to discontinued operations. 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations. Forward-Looking Statements This report (including, but not limited to, the information contained in Managements Discussion
and Analysis of Financial Condition and Results of Operations) contains forward-looking statements
that reflect managements current beliefs and estimates of future economic circumstances, industry
conditions, the Companys performance and financial results. All statements, trend analysis and
other information concerning possible or assumed future results of operations of the Company and
the real estate investments it has made constitute forward-looking statements. Shareholders and
others should understand that these forward-looking statements are subject to numerous risks and
uncertainties, and a number of factors could affect the future results of the Company and could
cause those results to differ materially from those expressed in the forward-looking statements
contained herein. These factors include local and national economic conditions, the amount of new
construction, affordability of home ownership, interest rates on single-family home mortgages and
on the Companys variable-rate borrowings, government regulation, price inflation, the level of
real estate and other taxes imposed on the properties, labor problems and natural disasters and
other items discussed under Risk Factors in Item 1 of this report. General The Companys primary business is the operation of multifamily apartment properties as long-term
investments. Accordingly, the Companys operating results will depend primarily on the net
operating income generated by its multifamily apartment properties. This, in turn, will depend on
the rental and occupancy rates of the properties and on the level of operating expenses. Occupancy
rates and rents are directly affected by the supply
of, and demand for, apartments in the market areas in which a property is located. Several factors
influence this, including local and national economic conditions, the amount of new apartment
construction and interest rates on single-family mortgage loans. In addition, factors such as
government regulation (such as zoning laws), inflation, real estate and other taxes, labor problems
and natural disasters can affect the economic operations of a property. 14




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##### Table of Contents



The multifamily real estate industry is experiencing soft market conditions in most markets
nationwide, including many of those in which the Company owns properties. These conditions are
primarily attributable to (i) slow economic growth which has limited job creation and the number of
new households, (ii) historically low mortgage interest rates which have made home ownership more
affordable for many persons who would otherwise be renting apartments and (iii) continuous building
of new apartment properties in markets that are already experiencing low occupancy rates. In
response to these conditions, the Company has had to reduce rental rates and grant rental
concessions to attract and retain quality tenants and maintain the physical occupancy levels at its
properties. These measures allowed the Company to increase the overall average physical occupancy
of its multifamily apartment properties from 90% during 2003 to 92% in 2004 including the
additional properties related to the AFREZ merger in June 2004. The physical occupancy for
properties owned by the Company prior to the AFREZ merger was 93% in 2004. The average economic
occupancy of the Companys multifamily apartment properties was 81% during 2003 and 2004. Economic
occupancy is defined as the net rental income divided by the maximum amount of rental income which
could be derived from each property. This statistic is reflective of vacancy, rental concessions,
delinquent rents, bad debt and other non-revenue units such as model units and employee units. In 2003, the Company expanded the types of assets in which it may invest to include (i) Agency
Securities issued or guaranteed as to the payment of principal or interest by an agency of the U.S.
government or a federally-chartered corporation such as the FNMA, GNMA or the FHLMC (Agency
Securities); (ii) mezzanine-level financing provided to unaffiliated developers of residential
real estate which can take a variety of forms including subordinated mortgage loans and preferred
equity investments; and (iii) equity investments in other REITs and similar real estate companies,
which can include publicly-traded common and preferred stocks, as well as controlling and
non-controlling interests in other real estate businesses such as property management companies. As
of December 31, 2004, the Company held Agency Securities with a fair market value of approximately
$26.2 million and investments in other real estate companies with a fair market value of
approximately $4.3 million. By investing in Agency Securities, mezzanine-level financing of residential properties, and
investments in other real estate companies, the Company seeks to supplement and stabilize its cash
flow by investing in assets that are less affected by the variables that affect the cash flow
generated by investments in apartments. In addition, investments in Agency Securities will allow
the Company to quickly invest the proceeds from the sale of additional stock or from the sale of
any of its real property investments at potentially higher returns than traditional money market
investments. The overall mix of these various types of investments will vary from time to time as
the Company seeks to take advantage of opportunities in the real estate industry. In general,
however, it is anticipated that at least 80% of the Companys equity capital will be invested in
multifamily apartment properties. As of December 31, 2004, approximately 81% of the Companys
equity capital was invested in multifamily apartment properties. Critical Accounting Policies The preparation of financial statements in accordance with GAAP requires management of the Company
to make a number of judgments, assumptions and estimates. The application of these judgments,
assumptions and estimates can affect the amounts of assets, liabilities, revenues and expenses
reported by the Company. All of the Companys significant accounting policies are described in Note
2 to the Companys consolidated financial
statements filed in response to Item 8 of this report. The Company considers the following to be
its critical accounting policies as they involve judgments, assumptions and estimates that
significantly affect the preparation of its consolidated financial statements. 15




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##### Table of Contents



Investment in Agency Securities Valuation Because all of the Companys investments in Agency Securities are classified as
available-for-sale securities, they are carried on the balance sheet at their estimated fair
values. The estimated fair values reflect the average of price quotes received from brokers, which
are reviewed by the Company. Price quotes are subject to the brokers judgments, assumptions and
estimates. Effect of classification of securities on earnings Because the Companys investments in Agency
Securities are classified as available-for-sale securities, changes in estimated fair values are
recorded as adjustments to accumulated other comprehensive income, which is a component of
stockholders equity, rather than through earnings. The Company does not intend to hold any of its
securities for trading purposes; however, if the Companys available-for-sale securities were
classified as trading securities, there could be substantially greater volatility in the Companys
earnings. Investment in Real Estate Establishment of depreciation policy- The Companys investment in real estate is carried on the
balance sheet at cost less accumulated depreciation. Depreciation of real estate is based on the
estimated useful life of the related asset, 27-1/2  40 years on multifamily residential apartment
buildings, 31-1/2 years on commercial buildings and five to fifteen years on capital improvements,
and is calculated using the straight-line method. Depreciation of capital improvements on the
Companys commercial property is based on the term of the related tenant lease using the
straight-line method. Shorter or longer depreciable lives and method of depreciation directly
impact depreciation expense recorded in earnings. Establishment of capitalization policy- Maintenance and repairs are charged to expense as
incurred, while significant improvements, renovations and replacements are capitalized. The
Companys capitalization policy is based on managements judgment and is not necessarily consistent
with companies of similar type as there is diversity in such accounting policies adopted by the
real estate industry. The Company believes its policy is reasonable in that it capitalizes costs
considered to add value to the property, while it expenses those costs which are considered
recurring maintenance items. In particular, the cost of replacing carpet, vinyl flooring and
appliances in individual apartments have been expensed, although some real estate companies
capitalize these costs. Beginning in 2005, the Company modified its capitalization policy. The Company now capitalizes the
appliances within the individual units including such items as ovens, refrigerators and water
heaters. These items were traditionally expensed as incurred. The Company has also modified its
policy to reduce specific thresholds for capitalizing certain items. The Company will continue to
expense carpet and vinyl flooring as incurred. These modifications occurred beginning in 2005 and
will only affect newly acquired assets on a prospective basis. This change is accounted for as a
change in accounting estimate and will be accounted for prospectively. Review of properties for impairment- Management reviews each property for impairment at least
annually and whenever events or changes in circumstances indicate that the carrying value of a
property may not be recoverable. The review of recoverability is based upon comparing the net book
value of each real estate property to the sum of its estimated undiscounted future cash flows. If
impairment exists due to the inability to recover the carrying value of a property, an impairment
loss is recorded to the extent that the carrying value of the property exceeds its estimated fair
value. The recognition of an impaired property and the potential impairment calculation are subject
to a considerable degree of judgment, the results of which when applied under different conditions
or assumptions could have a material impact on the financial statements. The 16




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##### Table of Contents



estimated future cash flow of each property is subject to a significant amount of uncertainty in
the estimation of future rental receipts, future rental expenses, and future capital expenditures.
Such estimates are affected by economic factors such as the rental markets and labor markets in
which the properties operate, the current market values for properties in the rental markets, and
tax and insurance expenses. Different conditions or different assumptions applied to the
calculation may result in different results. The Company does periodically compare the results of
its estimates with historical results to evaluate the reasonableness and accuracy of its estimates
and adjusts its estimates accordingly. Results of Operations The tables below compare the results of the Companys operations for each year shown. As of January
1, 2003, the Company merged with America First Apartment Investors, L.P. (the Partnership). As a
result of this merger, the Company assumed the assets, liabilities and business operations of the
Partnership. The Company itself had no material assets or operations prior to its merger with the
Partnership. Accordingly, the results of operations of the Company for all periods prior to January
1, 2003 are those of the Partnership. As previously discussed in Item 1. Business, the Company merged with AFREZ on June 3, 2004.
Therefore, the Companys results of operations for 2004 reflect the affects of this merger (in
thousands). For the
    
    
    For the
    
    
    For theYear Ended
    
    
    Year Ended
    
    
    Year EndedDec. 31, 2004
    
    
    Dec. 31, 2003
    
    
    Dec. 31, 2002Rental income
    
    $
    35,319
    
    
    $
    24,123
    
    
    $
    24,862Real estate operating expenses
    
    
    (19,879
    )
    
    
    (13,022
    )
    
    
    (12,867
    )Depreciation expense
    
    
    (6,891
    )
    
    
    (5,001
    )
    
    
    (4,964
    )Real estate
operating margin
    
    
    8,549
    
    
    
    6,100
    
    
    
    7,031Other incomeInterest income on cash and cash equivalents
and agency securities and dividend income
    
    
    770
    
    
    
    331
    
    
    
    317Gain on Jefferson Place subordinate note
    
    
    
    
    
    
    4,444
    
    
    
    Gain on sales of corporate equity securities
    
    
    212
    
    
    
    
    
    
    
    Other income
    
    
    982
    
    
    
    4,775
    
    
    
    317Other expensesInterest expense
    
    
    5,699
    
    
    
    4,316
    
    
    
    4,324General and administrative expenses
    
    
    3,997
    
    
    
    1,910
    
    
    
    1,773Amortization
expense - in-place lease intangibles
    
    
    2,466
    
    
    
    
    
    
    
    Amortization
expense - debt financing costs
    
    
    253
    
    
    
    288
    
    
    
    261Property management internalization expense
    
    
    5,911
    
    
    
    
    
    
    
    Other expenses
    
    
    18,326
    
    
    
    6,514
    
    
    
    6,358Income (loss) from continuing operations
    
    $
    (8,795
    )
    
    $
    4,361
    
    
    $
    990Income from discontinued operations
    
    
    6,030
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    (2,765
    )
    
    $
    4,361
    
    
    $
    990
 17




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##### Table of Contents



Year Ended
    
    
    Year Ended2004 compared to 2003
    
    
    2003 compared to 2002Dollar
    
    
    Percentage
    
    
    Dollar
    
    
    PercentageChange
    
    
    Change
    
    
    Change
    
    
    ChangeRental income
    
    $
    11,196
    
    
    
    46
    %
    
    $
    (739
    )
    
    
    -3
    %Real estate operating expenses
    
    
    6,857
    
    
    
    53
    %
    
    
    155
    
    
    
    1
    %Depreciation expense
    
    
    1,890
    
    
    
    38
    %
    
    
    37
    
    
    
    1
    %Real estate
operating margin
    
    
    2,449
    
    
    
    40
    %
    
    
    (931
    )
    
    
    -13
    %Other incomeInterest income on cash and cash equivalents
and agency securities and dividend income
    
    
    439
    
    
    
    (A
    )
    
    
    14
    
    
    
    4
    %Gain on Jefferson Place subordinate note
    
    
    (4,444
    )
    
    
    (A
    )
    
    
    4,444
    
    
    
    (A
    )Gain on sales of corporate equity securities
    
    
    212
    
    
    
    (A
    )
    
    
    
    
    
    
    Other income
    
    
    (3,793
    )
    
    
    -79
    %
    
    
    4,458
    
    
    
    1406
    %Other expensesInterest expense
    
    
    1,383
    
    
    
    32
    %
    
    
    (8
    )
    
    
    General and administrative expenses
    
    
    2,087
    
    
    
    (A
    )
    
    
    137
    
    
    
    8
    %Amortization
expense - in -place lease intangibles
    
    
    2,466
    
    
    
    (A
    )
    
    
    
    
    
    
    Amortization
expense - debt financing costs
    
    
    (35
    )
    
    
    -12
    %
    
    
    27
    
    
    
    10
    %Property management internalization expense
    
    
    5,911
    
    
    
    (A
    )
    
    
    
    
    
    
    Other expenses
    
    
    11,812
    
    
    
    (A
    )
    
    
    156
    
    
    
    2
    %Net income (loss) from continuing operations
    
    $
    (13,156
    )
    
    
    (A
    )
    
    $
    3,371
    
    
    
    (A
    )Income from discontinued operations
    
    
    6,030
    
    
    
    (A
    )
    
    
    
    
    
    
    Net income (loss)
    
    $
    (7,126
    )
    
    
    (A
    )
    
    $
    3,371
    
    
    
    (A
    )
   (A)
    
    Percentage change is not meaningful due to the large change or unusual nature of the line items
in one period compared to the other period. Year Ended December 31, 2004 Compared to the Year Ended December 31, 2003 Rental income.An increase of approximately $10.8 million in rental income was attributable to
seven months of income from the properties acquired through the merger with AFREZ. Rental income
generated by the properties held by the Company prior to the merger with AFREZ (same store)
increased approximately $400,000 during 2004 compared to rental income generated during 2003. Same
store rent per unit increased to $7,040 per unit in 2004 compared to $6,571 per unit in 2003. Rent
per unit is calculated by dividing rental income by the total number of units in the properties
that produced those revenues. Real estate operating expenses.Real estate operating expenses are comprised principally of
real estate taxes, property insurance, utilities, repairs and maintenance, property management
fees, and salaries and related employee expenses of on-site employees. An increase in real estate
operating expenses of approximately $6.0 million during 2004 was attributable to seven months of
expense from the properties acquired through the merger with AFREZ. Same store real estate
expenses increased
approximately $900,000 compared to 2003. Hurricane related expenses for 2004 totaled
approximately $257,000. The remaining increase in same store real estate expenses is due to
salaries, recurring repairs and maintenance and administrative expenses. Depreciation expense.The increase in depreciation expense of $1.9 million is entirely
related to the acquisition of fourteen additional properties through the merger with AFREZ and the
inclusion of the depreciation expense of these properties for seven months of the year.
Depreciation expense incurred by the properties held by the Company prior to the merger with AFREZ
was consistent with the depreciation expense incurred during the same period in 2003. 18




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##### Table of Contents



Interest income on cash and cash equivalents and Agency Securities and dividend income.The
increase is primarily attributable to its investments in Agency Securities. The average amount
invested in Agency Securities during 2004 was approximately $30.1 million compared to approximately
$9.0 million during 2003. Gain on Jefferson Place subordinate note.On June 26, 2003, the owners of Jefferson Place
Apartments sold the property. The Company recorded a gain of approximately $4.4 million on the
repayment of its subordinate note due from Jefferson Place Apartments. The Company did not record
any income from this transaction in 2004. Interest expense.Interest expense includes interest paid on debt, amortization of financing
costs and the effect of settled interest rate swaps. The increased interest expense is directly
attributable to seven months of interest expense on borrowings assumed through the merger with
AFREZ of approximately $78.0 million. Average debt related to non-AFREZ properties remained flat
year over year. General and administrative expenses.The majority of the increase is attributable to the
merger with AFREZ and the inclusion of its corporate general and administrative expenses for seven
months of the year. The most significant impact was the increase due to salaries and related
benefits which was approximately $1.1 million and the increase due to administrative fees which was
approximately $400,000. In addition, there was approximately $300,000 of costs associated with the
Companys implementation of Sarbanes-Oxley Section 404 pertaining to the Companys internal
controls. Amortization expense  in-place lease intangibles.This increase is directly related to the
amortization of the in-place lease intangibles recorded as a result of the merger with AFREZ.
In-place lease intangibles arise as a result of the allocation of the total acquisition costs
whereby the Company allocates a portion of the total acquisition cost of a property acquired to
leases in existence as of the date of acquisition. The estimated valuation of in-place leases is
calculated by applying a risk-adjusted discount rate to the projected cash flow realized at each
property during the estimated lease-up period it
would take to lease these properties. This allocated cost is amortized over the average
remaining term of the leases (approximately twelve months). Property management internalization expense.The Company acquired certain property management
assets, rights to use certain proprietary systems, certain property management agreements, certain
employment agreements and other intangible assets in November 2004. Of the $6.8 million acquisition
price, $5.9 million was expensed. The amount expensed was an allocation of the acquisition price
to the termination of the existing property management relationship on the Companys properties.
Through the acquisition of the property management assets, the Company internalized the property
management function. As a result, the Company will no longer pay property management fees
previously expensed in real estate operating expense. Discontinued Operations.On December 15, 2004, the Company sold The Glades Apartments. The
Glades Apartments was sold for a total sales price of $20.0 million which consisted of cash and
debt assumed by the buyer. The net cash proceeds to the Company were approximately $11.1 million,
net of closing costs of approximately $149,000. A gain on the sale of this property was realized in
the amount of $6.0 million. The Company acquired this property during 2004. Year Ended December 31, 2003 Compared to the Year Ended December 31, 2002 Rental income.The decrease is due to the decline in the economic occupancies of the
properties. Rental concessions significantly increased in order to attract and retain qualified
tenants, and have reduced net effective rental rates earned at the Companys properties. In
addition, the average physical occupancy of the Companys multifamily apartment properties declined
by 2% in 2003. As a result, the average effective annual 19




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##### Table of Contents



rentals per unit of the Companys multifamily apartment properties decreased to $6,571 in 2003 from
$6,777 in 2002. Real estate operating expenses.Real estate operating expenses, comprised principally of real
estate taxes, property insurance, utilities, property management fees, repairs and maintenance, and
salaries and related employee expenses of on-site employees, increased primarily due to an overall
increase in the premium rates for property insurance, which was approximately $59,000 and increases
in salaries and related expenditures of $135,000. This was slightly offset by reductions in
management fees and contract expenses. Depreciation expense.The increase is attributable to capital improvements of approximately
$409,000 made during 2003. Interest on cash and cash equivalents and agency securities and dividend income.Interest on
cash and cash equivalents and dividend income increased a net $14,000 in 2003 compared to 2002.
This increase is due to the purchase of Agency Securities during the last quarter of 2003. The
Company purchased Agency Securities with a par value of $35.3 million during the fourth quarter of 2003. The pools have stated rates ranging from
4.02% to 4.19% and various principal maturities. The premium paid related to these Agency
Securities will be amortized using the effective yield method over the life of the pools. Prior to
the fourth quarter of 2003, the Company had no such investments and did not record any such
interest income. Offsetting this increase is a decrease in interest income earned on cash and cash
equivalents which was primarily due to a decrease in the average interest rate earned on cash and
cash equivalents. The average interest rate during 2002 was 1.79% compared to 1.12% for 2003. Interest expense.The decrease is due to the decline in the average interest rate of the
Companys variable rate debt which declined to 1.68% in 2003, compared to 2.03% in 2002.
Approximately 13% of the Companys bonds and mortgage notes payable bear interest at variable rates
as of December 31, 2003. General and administrative expenses.The increase is primarily due to an increase in board of
directors fees, stock option compensation, salaries and employee benefits, insurance and
accounting and legal fees. The Company incurred approximately $38,000 of compensation expense
related to its stock option plan. In addition, the Company has incurred increases in legal and
accounting fees which are primarily due to the newly enacted Sarbanes-Oxley and other regulatory
compliance requirements. These increases were partially offset by decreases in filing and servicing
fees due to reduced rates. Gain on Jefferson Place subordinate note.On June 26, 2003, Jefferson Place Apartments were
sold and the Company recorded a gain of approximately $4.4 million on the repayment of its
subordinate note due from Jefferson Place Apartments. The Company did not record any income from
this transaction in 2002. Funds From Operations (FFO) The following sets forth a reconciliation of the Companys net income (loss) as determined in
accordance with GAAP and its FFO for the periods set forth (in thousands): 20




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##### Table of Contents



For the
    
    
    For the
    
    
    For the
    
    
    For the
    
    
    For theYear Ended
    
    
    Year Ended
    
    
    Year Ended
    
    
    Year Ended
    
    
    Year EndedDec. 31, 2004
    
    
    Dec. 31, 2003
    
    
    Dec. 31, 2002
    
    
    Dec. 31, 2001
    
    
    Dec. 31, 2000Net income (loss)
    
    $
    (2,765
    )
    
    $
    4,361
    
    
    $
    990
    
    
    $
    2,488
    
    
    $
    2,606Depreciation expense
    
    
    7,122
    (1)
    
    
    5,001
    
    
    
    4,964
    
    
    
    4,938
    
    
    
    4,349Amortization of
in-place lease
intangibles
    
    
    2,797
    (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gain on sale of
discontinued operations
    
    
    (5,973
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Funds From Operations
    
    $
    1,181
    
    
    $
    9,362
    
    
    $
    5,954
    
    
    $
    7,426
    
    
    $
    6,955
   (1 ) Depreciation includes $231,000 and amo rtization of in-place lease intangibles
includes $331,000 related to discont inued operations. The Companys FFO decreased $8.2 million or 87% to $1.2 million for the year ended 2004, compared
to $9.4 million for the same period in 2003. This is primarily due to the property management
internalization expense related to the Company purchase of certain property management agreements,
employment agreements and other intangible assets from America First Properties. In conjunction
with this acquisition, the Company recorded expense of $5.9 million. In addition, FFO in 2003
included a gain of approximately $4.4 million related to the repayment of the subordinated note due
from the owners of Jefferson Place Apartments. The decrease was offset by favorable rental income
compared to 2003, primarily due to the AFREZ merger. FFO is calculated in accordance with the definition of FFO that is recommended by the National
Association of Real Investment Trust (NAREIT). To calculate FFO under the NAREIT definition,
depreciation and amortization expenses related to the Companys real estate, gains or losses
realized from the disposition of depreciable real estate assets, and certain extraordinary items
are added back to the Companys net income. The Company believes that FFO is an important non-GAAP
measurement because FFO excludes the depreciation expense on real estate assets and real estate
generally appreciates over time or maintains residual value to a much greater extent than other
depreciable assets such as machinery or equipment. Additionally, other real estate companies,
analysts and investors utilize FFO in analyzing the results of real estate companies. While the Company uses the NAREIT definition of FFO, the Companys FFO may not be comparable to
other REITs or real estate companies with similar assets. This is due in part to the differences in
capitalization policies used by different companies and the significant effect these capitalization
policies have on FFO. Real estate costs incurred in connection with real estate operations which
are accounted for as capital improvements are added to the carrying value of the property and
depreciated over time whereas real estate costs that are expensed are accounted for as a current
period expense. This affects FFO because costs that are accounted for as expenses reduce FFO.
Conversely, real estate costs that are capitalized and depreciated are added back to net income to
calculate FFO. The Companys capitalization policy is through 2004 was to treat most recurring
capital improvements, such as appliances, vinyl flooring and carpet as expenses, and this may cause
the Companys reported FFO to be lower than peer companies that capitalize recurring improvements
of these types. Beginning in 2005, the Company modified its capitalization policy. The Company now capitalizes the
appliances within the individual units including such items as ovens, refrigerators and water
heaters. These items were traditionally expensed as incurred. The Company will continue to expense
items such as carpet and vinyl flooring as incurred. The Company has also modified its policy to
reduce specific thresholds for capitalizing certain items. These modifications occurred beginning
in 2005 and will only affect newly acquired assets on a prospective basis. This change will be
accounted for as a change in accounting estimate on a prospective basis. Although the Company considers FFO to be a useful measure of its operating performance, FFO should
not be considered as an alternative to net income or net cash flows from operating activities which
are calculated in accordance with GAAP. 21




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##### Table of Contents



Liquidity and Capital Resources The Companys primary source of cash is net rental revenues generated by its real estate
investments. Net rental revenues from a multifamily apartment property depend on the rental and
occupancy rates of the property and on the level of operating expenses. Occupancy rates and rents
are directly affected by the supply of, and demand for, apartments in the market areas in which a
property is located. This, in turn, is affected by several factors, such as: local or national
economic conditions, the amount of new apartment construction and affordability of home ownership.
In addition, factors such as government regulation (such as zoning laws), inflation, real estate
and other taxes, labor problems and natural disasters can affect the economic operations of a
property. The Company uses cash primarily to (i) pay the operating expenses of its multifamily apartment
properties, including the cost of capital improvements and, prior to November 2004, fees paid to
the property manager; (ii) to pay the operating expenses of the Companys administration, including
the fees paid to its Advisor; (iii) the payment of debt service on its bonds and mortgages payable;
(iv) the acquisition of additional multifamily apartment properties, Agency Securities and other
investments; and (v) the payment of dividends. Currently, the Companys cash provided by operations
is insufficient to fully fund the current level of dividends. While the Company has the ability to
fund the current level of dividends through other means, including proceeds from the sale of
properties, continued weakness in operating cash flows could negatively impact dividend rates. The
Company currently expects to maintain dividends at the current rate. The Companys principal business strategy is to acquire and operate multifamily apartment
properties as long-term investments. In order to achieve its acquisition strategy, the Company has
the authority to finance the acquisition of additional real estate in a variety of manners,
including raising additional equity capital. To fully pursue its acquisition strategy, the Company
will need to raise additional equity capital. In June 2004, the Company filed a Form S-3
registration statement for $200 million of capital stock which may be sold from time to time in
order to raise additional equity capital in order to support the Companys business strategy. To
date, no securities have been sold under this registration statement. In addition to the funds that the Company may raise through the issuance of additional equity
capital, it may also be able to borrow money to finance the acquisition of additional real estate
assets. Borrowing to acquire additional multifamily apartment properties is generally in the form
of long-term taxable or tax exempt mortgage loans secured by the acquired properties. The amount of
debt the Company can incur is not limited by its Charter or otherwise. In general, however, the
amount of borrowing used to finance the overall multifamily apartment property portfolio is
approximately 55% to 65% of the purchase price of these assets, although higher or lower levels of borrowings may be
used on any single property. The multifamily apartment properties which the Company currently owns are financed under twenty
mortgage financings with an aggregate principal balance of $167.2 million as of December 31, 2004.
These mortgages consisted of thirteen tax-exempt bonds with an aggregate principal balance
outstanding of approximately $111.5 million and seven taxable mortgage notes payable with a
combined principal balance of approximately $55.7 million. Approximately 63% of these mortgage
obligations bear interest at a fixed rate with a weighted average interest rate of 5.33% for the
year ended December 31, 2004. The remaining 37% of these mortgage obligations bear interest at
variable rates that had a weighted average interest rate of 2.09%, including swaps, for the year
ended December 31, 2004. Maturity dates on these mortgage obligations range from September 2005 to
July 2031. Each of these mortgage loans has been made on a nonrecourse basis, which means that the
lenders source of payment in the event of a default is limited to foreclosure of the underlying
property securing the mortgage loan. The mortgage obligation maturing in 2005 relates to the
Littlestone at Village Green property and amounts to approximately $4.9 million. The Company plans
to refinance this obligation when due. 22




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##### Table of Contents



In addition, the Company has borrowings in the form of Notes payable and borrowings under
repurchase agreements. The Notes payable, which were assumed as part of the merger with AFREZ, bear
interest at a variable rate with a weighted average interest rate for the seven-month period since
assumption of 2.73%. These Notes payable are due January 15, 2008. The borrowings under repurchase
agreements bear interest at fixed rates with a weighted average interest rate of 2.32% for the year
ended December 31, 2004 and mature within one year. Acquisitions of Agency Securities are principally financed with repurchase agreements. Repurchase
agreements take the form of a sale of a security (in this case, an Agency Security owned by the
Company) to a counterparty at an agreed upon price in return for the counterpartys simultaneous
agreement to resell the same securities back to the owner at a future date at a higher price.
Although structured as a sale and repurchase obligation, a repurchase agreement operates as a
borrowing under which the Company pledges Agency Securities that it already owns as collateral to
secure a short-term loan with a counterparty. The borrowings are then used to acquire additional
Agency Securities, which themselves may be used as collateral for additional borrowings under
repurchase agreements. The difference between the sale and repurchase price is the cost, or
interest expense, of borrowing under the repurchase agreements. The repurchase agreements may
require the Company to pledge additional assets to the lender in the event the market value of
existing pledged collateral declines below a specified percentage. The pledged collateral may
fluctuate in value due to, among other things, principal repayments, market changes in interest
rates and credit quality. The Company retains beneficial ownership of the pledged collateral,
including the right to distributions, while the counterparty maintains custody of the collateral
securities. At the maturity of a repurchase agreement, the Company is required to repay the loan
and concurrently receive back its pledged collateral from the lender or, may renew the repurchase agreement at the
then prevailing financing rate. As of December 31, 2004, the Company had borrowed approximately
$20.9 million under short-term repurchase agreements to finance its investment in Agency
Securities. These repurchase agreements have a weighted average interest rate of 2.28% and a
weighted average maturity of 226 days. Total borrowings to acquire Agency Securities are currently
limited by the Company to not more than eight times the amount of equity capital invested or set
aside for investment by the Company in Agency Securities, although the Company can increase this
limitation with the approval of the Board of Directors. The Company may use derivatives and other hedging strategies to help mitigate interest rate risks
on the long-term borrowings used to finance its properties and the prepayment and interest rate
risks on its Agency Securities. The Company may use interest rate caps, interest rate swaps or
other derivative instruments to achieve these goals, but the timing and amount of hedging
transactions, if any, will depend on numerous market conditions, including, but not limited to, the
interest rate environment, managements assessment of the future changes in interest rates and the
market availability and cost of entering into such hedge transactions. In addition, managements
ability to employ hedging strategies may be restricted by requirements for maintaining REIT status.
It is against Management policy to enter into derivatives for speculative or trading purposes. Cash provided by operating activities for the year ended
December 31, 2004 increased by $3.3
million compared to the same period a year earlier due to higher net rental income as a result of
the AFREZ merger. Cash provided by investing
activities increased approximately $50.1 million for 2004 compared to
2003 due to the net cash acquired in the acquisition of AFREZ of approximately $8.4 million, the
impact of principal received on Agency Securities of approximately $11.0 million in 2004 which were
not owned in the previous period, proceeds from the sale of real estate of $11.1 million and
proceeds received from the sale of corporate equity securities owned by the Company of $3.9
million. Also contributing to the change was the acquisition of Agency Securities of $36.1 million
in 2003 compared to only $1.6 million of Agency Securities acquisitions in 2004. Offsetting the
increases were cash paid for the property management internalization acquisition of $6.9 million,
including fees, the acquisition of real estate of approximately $4.6 million, the acquisition of
AFREZ of 23




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##### Table of Contents



$4.0 million and the net proceeds received in the prior period on the repayment of the Jefferson
Place subordinate note of approximately $2.4 million. Net cash used in financing activities for the year 2004 increased $48.2 million compared to 2003.
This was primarily due to a decrease in the proceeds from borrowings under repurchase agreements.
In 2003, the Company received $33.0 million related to repurchase agreements borrowings compared to
none in 2004. Additionally, principal payments of approximately $12.1 million were made on
borrowings under repurchase agreements during 2004 that were not made in 2003 and dividends paid
increased $2.7 million due to the higher number of shareholders as a result of the merger with
AFREZ. Off Balance Sheet Arrangements As of December 31, 2004 and 2003, the Company did not have any relationships with
unconsolidated entities or financial partnerships, such as entities often referred to as structured
finance or special purpose entities, which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In
addition, the Company does not engage in trading activities involving non-exchange traded
contracts. As such, the Company is not materially exposed to any financing, liquidity, market, or
credit risk that could arise if it had engaged in such relationships. The Company does not have any
relationships or transactions with persons or entities that derive benefits from their
non-independent relationships with the Company or its related parties other than what is disclosed
in Note 12 to the Companys consolidated financial statements. Contractual Obligations The Company had the following contractual obligations as of December 31, 2004 (in thousands): Payments due by periodLess than
    
    1-3
    
    3-5
    
    More thanTotal
    
    1 year
    
    years
    
    years
    
    5 yearsNotes payable
    
    $
    2,413
    
    
    $
    
    
    
    $
    
    
    
    $
    2,413
    
    
    $
    Bonds and mortgage
notes payable
    
    $
    167,150
    
    
    $
    6,000
    
    
    $
    24,827
    
    
    $
    26,685
    
    
    $
    109,638Borrowings under
repurchase
agreements
    
    $
    27,875
    
    
    $
    27,875
    
    
    $
    
    
    
    $
    
    
    
    $
    
 The company is also contractually obligated to pay interest on its long-term debt obligations.
The weighted average interest rate of the long-term debt obligations outstanding as of December 31,
2004 was approximately 5.3% for fixed-rate debt and 2.09% for variable-rate debt. The Company intends to renew its repurchase agreements which come due in 2005 with repurchase
agreements having similar terms. Inflation Substantially all of the resident leases at the Companys multifamily apartment properties allow,
at the time of renewal, for adjustments in the rent payable, and thus may enable the Company to
seek rent increases. The substantial majority of these leases are for one year or less. The
short-term nature of these leases generally serves to reduce the risk to the Company of the adverse
effects of inflation; however, market conditions may prevent the Company from increasing rental
rates in amounts sufficient to offset higher operating expenses. 24




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##### Table of Contents



Recent Accounting Pronouncements In December 2004, the FASB issued SFAS No. 152, Accounting for Real Estate Time-Sharing
Transactions an amendment of FASB Statements No. 66 and 67. This Statement amends SFAS No. 66,
Accounting for Sales of Real Estate to reference the financial accounting and reporting guidance
for real estate time-sharing transactions that is provided in AICPA Statement of Position (SOP)
04-2, Accounting for Real Estate TimeSharing Transactions. This Statement also amends SFAS No.
67, Accounting for Costs and Initial Rental Operations of Real Estate Projects to specify that
guidance relating to (a) incidental operations (b) costs incurred to sell real estate projects does
not apply to real estate time-sharing transactions. This Statement is effective for fiscal years
beginning after June 15, 2005. The Company does not believe SFAS No. 152 will have a material
impact on the consolidated financial statements. In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary Assets an amendment of
APB No. 29. This Statement amends APB Opinion No. 29, Accounting for Non-monetary Transactions
to eliminate the exception for non-monetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of non-monetary assets that do not have commercial
substance. This Statement requires that an entity record a non-monetary exchange at fair value and
recognize any gain or loss if the transaction has commercial substance. This Statement is effective
for fiscal years beginning after June 15, 2005. The Company does not believe the adoption of SFAS
No. 153 will have a material impact on our consolidated financial statements. In December 2004, the FASB issued SFAS No. 123 (Revised 2004), Share-Based Payment.This
Statement is a revision of SFAS No. 123, Accounting for Stock-Based Compensation,and supersedes
APB No. 25, Accounting for Stock Issued to Employees.The Statement requires companies to
recognize the expense associated with the grant-date fair value of stock options and other equity
based compensation issued to employees. This Statement is effective as of the beginning of the
first interim or annual period that commences after June 15, 2005. The Company currently recognizes
expense on equity based compensation in accordance with SFAS No. 123, as revised, and therefore
will not have a material impact on the consolidated financial statements of the Company. 
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Interest Rate Risk on Bonds and Mortgage Notes Payable
The Companys primary market risk exposure is interest rate risk. The Companys exposure to market
risk for changes in interest rates relates primarily to its long-term borrowings. Interest rate
risk is highly sensitive to many factors, including governmental, monetary and tax policies,
domestic and international economic and political considerations and other factors that are beyond
the Companys control. The Companys interest rate risk management objective is to limit the impact of interest rate
changes on earnings and cash flows and to lower its overall borrowing costs. To
achieve its objectives, the Company borrows primarily at fixed rates and enters into derivative
financial instruments, such as interest rate swaps, in order to manage and mitigate its interest
rate risk. The Company has not entered into derivative instrument transactions for speculative
purposes. As of December 31, 2004, approximately 63% of the Companys long-term borrowings consisted of
fixed-rate financing. The remaining 37% consisted of variable-rate financing. Variations in
interest rates affect the Companys cost of borrowing on its variable-rate financing. The interest
rates payable by the Company on these obligations increase or decrease with certain index interest
rates. If the Companys borrowing costs increase, the amount of cash available for distribution to
shareholders will decrease. Had the average index rates increased or 25




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decreased by 100 basis points during the year ended December 31, 2004, interest expense on the
Companys variable-rate debt financing would have increased or decreased by approximately $200,000,
respectively. The following table presents information about the Companys financial instruments that are
sensitive to changes in interest rates, including principal amounts and weighted average interest
rates by year of maturity for the Companys bonds and mortgage payable (in thousands): Fixed-Rate BorrowingsWeightedPrincipal
    
    
    AverageMaturity
    
    Amount
    
    
    Interest Rate2005
    
    $
    5,898
    
    
    
    5.30
    %2006
    
    
    1,009
    
    
    
    5.20
    %2007
    
    
    13,487
    
    
    
    5.18
    %2008
    
    
    14,233
    
    
    
    5.19
    %2009
    
    
    12,183
    
    
    
    5.35
    %Thereafter
    
    
    58,006
    
    
    
    5.65
    %$
    104,816
 Variable-Rate BorrowingsWeightedPrincipal
    
    
    AverageMaturity
    
    Amount
    
    
    Interest Rate (1)2005
    
    $
    103
    
    
    
    2.49
    %2006
    
    
    111
    
    
    
    2.49
    %2007
    
    
    10,220
    
    
    
    2.49
    %2008
    
    
    129
    
    
    
    2.51
    %2009
    
    
    140
    
    
    
    2.50
    %Thereafter
    
    
    51,631
    
    
    
    2.50
    %$
    62,334167,150
   (1)Weighted average rate for the year ended December 31, 2004, assumes the current rates 26




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As of December 31, 2004, the Company had entered into the following derivative financial
instruments (in thousands): Interest Rate Swaps and CapsCounterparty
    
    
    
    
    
    
    CompanyNotional
    
    
    Receive/
    
    
    Notional
    
    
    PayMaturity
    
    Amount
    
    
    Cap Rate
    
    
    Amount
    
    
    RateFixed to Variable
    
    December 6, 2006
    
    $
    4,800
    (5)
    
    
    7.00
    %
    
    $
    4,800
    (5)
    
    
    2.33
    % (3)Fixed to Variable
    
    December 6, 2006
    
    $
    5,300
    (5)
    
    
    7.125
    %
    
    $
    5,300
    (5)
    
    
    2.33
    % (3)Fixed to Variable
    
    December 6, 2006
    
    $
    5,179
    (1)(5)
    
    
    7.75
    %
    
    $
    5,179
    (1)(5)
    
    
    2.33
    % (3)Variable to Fixed
    
    February 3, 2009
    
    $
    8,100
    
    
    
    1.68
    % (2)
    
    $
    8,100
    
    
    
    2.82
    %Variable to Fixed
    
    June 25, 2009
    
    $
    10,910
    
    
    
    1.68
    % (2)
    
    $
    10,910
    
    
    
    3.30
    %Fixed to Variable
    
    July 13, 2009
    
    $
    6,930
    (5)
    
    
    7.25
    %
    
    $
    6,930
    (5)
    
    
    2.33
    % (3)Fixed to Variable
    
    July 13, 2009
    
    $
    3,980
    (5)
    
    
    7.50
    %
    
    $
    3,980
    (5)
    
    
    2.33
    % (3)Interest Rate Cap
    
    December 22, 2009
    
    $
    13,400
    
    
    
    4.50
    % (4)
    
    
    N/A
    
    
    
    N/AInterest Rate Cap
    
    December 22, 2009
    
    $
    12,750
    
    
    
    4.50
    % (4)
    
    
    N/A
    
    
    
    N/A
   (1)Notional amount is tied to the The Exchange at Palm Bay bond payable and
adjusts downwards as principal payments are made on the bond payable.(2)Weighted average Bond Market Assoc iation rate for the three months ended December
31, 2004.(3)Weighted average Bond Market Assoc iation rate for the three months ended December
31, 2004 plus 0.65%.(4)Capped rate is tied to the weighted average Bond Market Association rate for the
month.(5)These are total return swaps The $10.9 million variable to fixed rate swap was entered into on top of and to mitigate the
variable rate risk of those fixed to variable rate swap maturing July 13, 2009. It effectively
fixes the interest rate on $10.9 million of bonds payable at 3.30% through June 25, 2009. The estimated fair value of the interest rate swap agreements was an asset of approximately $99,000
as of December 31, 2004. The Company does not use hedge accounting for its derivative instruments.
Therefore, changes in the fair value of its interest rate swaps and caps are reflected in the
statements of operations and comprehensive income (loss). As the above tables incorporate only those exposures or positions that existed as of December 31,
2004, they do not consider those exposures or positions that could arise after that date. The
Companys ultimate economic impact with respect to interest rate fluctuations will depend on the
exposures that arise during the period, the Companys risk mitigating strategies at that time and
interest rates. Prepayment Risk on Agency Securities As the Company receives repayments of principal on its Agency Securities, premiums paid on such
securities are amortized against interest income. Premiums arise when the Company acquires Agency
Securities at a price in excess of the principal balance of the mortgages securing such Agency
Securities or the par value of such Agency Securities if purchased at the original issue. For
financial accounting purposes interest income is accrued based on the outstanding principal balance
of the investment securities and their contractual terms. Purchase premiums on the Companys Agency
Securities are amortized against interest income over the lives of the securities using the
effective yield method, adjusted for actual prepayment activity. In general, an increase in the
prepayment rate will accelerate the amortization of purchase premiums, thereby reducing the
yield/interest income earned on such assets. Cash Concentrations of Credit Risk The Companys cash and cash equivalents are deposited primarily in a trust account at a single
financial institution and are not covered by the Federal Deposit Insurance Corporation. 27




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Item 8. Financial Statements and Supplementary Data. The Financial Statements and financial statement schedule of the Company are set forth in Item 15
of this report and are incorporated herein by reference. 
 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. There were no disagreements with the Companys independent accountants on accounting principles and
practices or financial disclosure during the fiscal years ended December 31, 2004 and 2003. 
 Item 9A. Controls and Procedures. (a) Evaluation of disclosure controls and procedures.The Companys Chief Executive Officer and
Chief Financial Officer have reviewed and evaluated the effectiveness of the Companys disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of
the period covered by this report. Based on that evaluation, the Chief Executive Officer and the
Chief Financial Officer have concluded that the Companys current disclosure controls and
procedures are effective, providing them with material information relating to the Company as
required to be disclosed in the reports the Company files or submits under the Exchange Act on a
timely basis. (b) Changes in internal controls over financial reporting.There were no changes in the Companys
internal control over financial reporting during the Companys most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the Companys internal control
over financial reporting. 28




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##### Table of Contents



Management Report On Internal Control Over Financial Reporting Management of the Company is responsible for establishing and maintaining adequate internal control
over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, the
Companys principal executive and principal financial officers and effected by the Companys Board,
management and other personnel to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance
with Generally Accepted Accounting Principles (GAAP) and includes those policies and procedures
that:  
    pertain to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of the assets of the Company;
    provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and that receipts and expenditures of
the Company are being made only in accordance with authorizations of management and Directors of
the Company; and
    provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Companys assets that could have a material effect on the
financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Projections of any evaluation of effectiveness to future periods are subject
to the risks that controls may become inadequate because of changes in conditions or that the
degree of compliance with the policies or procedures may deteriorate. The Companys management assessed the effectiveness of the Companys internal control over
financial reporting as of December 31, 2004. In making this assessment, the Companys management
used criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control-Integrated
Framework. Based on its assessment, the Companys management believes that, as of December 31,
2004, the Companys internal control over financial reporting was effective based on that criteria.
The Companys independent registered public accounting firm, Deloitte & Touche LLP, has issued an
audit report on managements assessment of the Companys internal control over financial reporting.
This report appears on the following page of this annual report on Form 10-K. 29




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of
America First Apartment Investors, Inc. We have audited managements assessment, included in the accompanying Management Report On
Internal Control Over Financial Reporting, that America First Apartment Investors, Inc. and
subsidiaries (the Company) maintained effective internal control over financial reporting as of
December 31, 2004, based on the criteria established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Companys
management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on managements assessment and an opinion on the
effectiveness of the Companys internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinions. A companys internal control over financial reporting is a process designed by, or under the
supervision of, the companys principal executive and principal financial officers, or persons
performing similar functions, and effected by the companys board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A companys internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including
the possibility of collusion or improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, managements assessment that the Company maintained effective internal control
over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based
on the criteria established in Internal ControlIntegrated Frameworkissued by the Committee of
Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as of December 31,
2004, based on the criteria established in Internal 30




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##### Table of Contents



ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway
Commission. We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements and financial statement
schedule as of and for the year ended December 31, 2004 of the Company and our report dated March
21, 2005 expressed an unqualified opinion on those financial statements and financial statement
schedule. /s/ DELOITTE & TOUCHE LLP Omaha,Nebraska
March 21, 2005 31




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##### Table of Contents



Item 9B. Other Information. Effective as of March 15, 2005, Joseph Grego left America First Companies LLC. As a result, Mr.
Grego will no longer serve as an officer of the Company and of America First Advisory Corporation,
the external advisor to the Company. 
 PART III 
 Item 10. Directors and Executive Officers of the Registrant. The information about directors required to be furnished pursuant to this Item 10 is incorporated
by reference to the Companys Definitive Proxy Statement for its 2005 Annual Meeting of
Stockholders to be filed with the SEC pursuant to Regulation 14A within 120 days after December 31,
2004 (the Proxy Statement) under the heading ELECTION OF DIRECTORS. The information about the
executive officers of the Company is as follows: Name
    
    Position Held
    
    Position Held SinceJohn H. Cassidy
    
    President and Chief Executive
Officer
    
    2003Michael J. Draper
    
    Vice President, Chief Financial Officer,
Treasurer and Secretary
    
    2005Maurice E. Cox, Jr.
    
    Executive Vice President-Investor
Relations
    
    2003
 John H. Cassidy, 53, was named President and Chief Executive Officer of the Company in
September 2003. Mr. Cassidy has been employed by America First since 1987 and has served in a
number of capacities with respect to the public real estate partnerships sponsored by America
First. From 1992 to 2002, he was President of America First Properties Management Company L.L.C.,
the property management subsidiary of America First. Michael J. Draper, 39, was named Chief Financial Officer of the Company in February 2005. Mr.
Draper joined America First Companies LLC (America First), the parent company of the Companys
external advisory company, in March 2004, and was named as the Companys Controller in April 2004.
He has also served as the Chief Financial Officer of America First since September 2004. Prior to
America First, Mr. Draper was employed with Transgenomic, Inc., a publicly traded bio-tech company,
from 2000 to 2004. He served as Chief Financial Officer and was previously the Controller. From
1997 through 1999 he was Vice President of Accounting and Finance for Midland Systems, Inc, a
computer hardware and networking solutions provider. Mr. Draper also spent 8 years in public
accounting with the firm of Deloitte & Touche, LLP from 1989 to 1997. Mr. Draper holds a bachelors
degree in Accounting and Business Administration from the University of Nebraska. Mr. Draper
replaces Mark A. Hiatt as Chief Financial Officer of the Company. Mr. Hiatt remains with the
America First organization and has been promoted to the position of President of America Firsts
newly formed affiliate, America First Real Estate Group LLC. Maurice E. Cox, Jr., 63, is the Companys Vice President-Investor Relations, a position he has
held since September 2003. Mr. Cox has been with America First since 1984 and has been in charge of
all investor relations activities for its public and private investment partnerships. He also serves as
President of America First Programs, L.L.C., an affiliated broker dealer. 32




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##### Table of Contents



Section 16(a) Beneficial Ownership Reporting Compliance The information required to be furnished pursuant to Section 16 (a) of the Securities Exchange Act
of 1934 is incorporated by reference to the Proxy Statement under the heading Section 16(a)
Beneficial Ownership Reporting Compliance. Code of Ethical Conduct and Code of Conduct The Company has adopted the Code of Ethical Conduct put in place by America First for its senior
executive and financial officers as required by Section 406 of the Sarbanes-Oxley Act of 2002. As
such this Code of Ethical Conduct covers all executive officers of the Company. The Company has
also adopted the Corporate Code of Conduct applicable to all directors, officers and employees of
America First which is designed to comply with the listing requirements of the NASDAQ Stock Market.
Both the Code of Ethical Conduct and the Corporate Code of Conduct
are available on the Companys website at www.apro-reit.com. 
 Item 11. Executive Compensation. The information required to be furnished pursuant to this Item 11 is incorporated by reference to
the Proxy Statement under the heading Compensation of Executive Officers. 
 Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required to be furnished pursuant to this Item 12 is incorporated by reference to
the Proxy Statement under the heading Ownership of Our Common Stock by Our Directors and Officers
and Principal Stockholders. 
 Item 13. Certain Relationships and Related Transactions. The information required to be furnished pursuant to this Item 13 is incorporated by reference to
the Proxy Statement under the heading Certain Relationships and Related Transactions. 
 Item 14. Principal Accounting Fees and Services. The information required to be furnished pursuant to this Item 14 is incorporated by reference to
the Proxy Statement under the heading Accounting Fees and Services. 
 PART IV 
 Item 15. Exhibits, Financial Statement Schedules. (a) The following documents are filed as part of this report:  1.
    Financial Statements. The following financial statements of the
Company are included in response to Item 8 of this report:  Report of Independent Registered Public Accounting Firm.Consolidated Balance Sheets of the Company and Subsidiaries as of December 31,
2004 and 2003. 33




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##### Table of Contents



Consolidated Statements of Income and Comprehensive Income of the Company and
Subsidiaries for the years ended December 31, 2004 and 2003 and of the
Partnership and Subsidiaries for the year ended December 31, 2002.Consolidated Statements of Stockholders Equity of the Company and Subsidiaries
for the years ended December 31, 2004 and 2003, and Consolidated Statement of
Partners Capital of the Partnership and Subsidiaries for the year ended
December 31, 2002.Consolidated Statements of Cash Flows of the Company and Subsidiaries for the
years ended December 31, 2004 and 2003, and Consolidated Statement of Cash
Flows of the Partnership and Subsidiaries for the year ended December 31, 2002.Notes to Consolidated Financial Statements of the Company and Subsidiaries, and
Notes to Consolidated Financial Statements of the Partnership and Subsidiaries.  2.
    Financial Statement Schedule. The information required to be set
forth in the financial statement schedule is included in Schedule III  Real
Estate and Accumulated Depreciation as of December 31, 2004 filed in response to
Item 8 of this report.3.
    Exhibits. The following exhibits were filed as required by Item
15(a)(3) of this report. Exhibit numbers refer to the paragraph numbers under
Item 601 of Regulation S-K:  2.1 Agreement and Plan of Merger, dated November 25, 2003, between the Company
and America First Real Estate Investment Partners, L.P. and Amendment to
Agreement and Plan of Merger, dated February 10, 2004 (incorporated by
reference to Exhibit 2.1 to Amendment No. 2 to the Companys Registration
Statement on Form S-4 (Commission File No. 333-111036) filed by the Company on
February 25, 2004).2.2 Agreement and Plan of Merger, dated June 18, 2002, between the Company and
America First Apartment Investors, L.P. (incorporated by reference to Exhibit
2.1 to the Companys Registration Statement on Form S-4 (Commission File No.
333-90690) filed by the Company on June 18, 2002).3.1 Articles of Incorporation of the Company (incorporated by reference to
Exhibit 3.1 to the Companys Registration Statement on Form S-4 (Commission
File No. 333-90690) filed by the Company on June 18, 2002).3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the
Companys Registration Statement on Form S-4 (Commission File No. 333-90690)
filed by the Company on August 1, 2002).4.1 Specimen of Common Stock Certificate of the Company (incorporated by
reference to Exhibit 4.1 to the Companys Registration Statement on Form S-4
(Commission File No. 333-90690) filed by the Company on June 18, 2002).10.1 Second Amended and Restated Advisory Agreement, dated June 3, 2004,
between the Company and America First Apartment Advisory Corporation
(incorporated by reference to Exhibit 10.1 to the Companys Form 10-Q (Commission File No.
000-49986) filed by the Company on August 16, 2004). 34




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##### Table of Contents



10.2 The Companys 2002 Stock Option Plan (incorporated by reference to
Exhibit 10.2 to the Companys Registration Statement on Form S-4 (Commission
File No. 333-90690) filed by the Company on June 18, 2002).10.3 $12,410,000 Promissory Note, dated December 11, 1997, from Park Trace
Apartments Limited Company to the City of Aurora, Illinois (The Covey at Fox
Valley Apartment Project) Series 1997 (incorporated herein by reference to Form
10-K dated December 31, 1997 filed pursuant to Section 13 or 15(d) of
Securities Exchange Act of 1934 by America First Apartment Investors, L.P.
(Commission File No. 0-20737)).10.4 Loan Agreement, dated December 1, 1997, between Park Trace Apartments
Limited Company and City of Aurora, Illinois (The Covey at Fox Valley Apartment
Project) Series 1997 (incorporated herein by reference to Form 10-K dated
December 31, 1997 filed pursuant to Section 13 or 15(d) of Securities Exchange
Act of 1934 by America First Apartment Investors, L.P. (Commission File No.
0-20737)).10.5 Indenture of Trust, dated December 1, 1997, between City Aurora, Illinois
and UMB Bank National Association (The Covey at Fox Valley Apartment Project)
Series 1997 (incorporated herein by reference to Form 10-K dated December 31,
1997 filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 by America First Apartment Investors, L.P. (Commission File No. 0-20737)).10.6 $1,385,000 Promissory Note, dated April 2, 1998, from Arizona Coral Point
Apartments Limited Company to The Industrial Development Authority of the
County of Maricopa (Coral Point Apartments Project) Series 1998A and 1998B
(incorporated herein by reference to Form 10-Q dated June 30, 1998 filed
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 by
America First Apartment Investors, L.P. (Commission File No. 0-20737)).10.7 $11,705,000 Promissory Note, dated April 2, 1998, from Arizona Coral Point
Apartments Limited Company to The Industrial Development Authority of the
County of Maricopa (Coral Point Apartments Project) Series 1998A and 1998B
(incorporated herein by reference to Form 10-Q dated June 30, 1998 filed
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 by
America First Apartment Investors, L.P. (Commission File No. 0-20737)).10.8 Loan Agreement, dated March 1, 1998, between The Industrial Development
Authority of the County of Maricopa and Arizona Coral Point Apartments Limited
Company (Coral Point Apartments Project) Series 1998A and 1998B (incorporated
herein by reference to Form 10-Q dated June 30, 1998 filed pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934 by America First Apartment
Investors, L.P. (Commission File No. 0-20737)).10.9 Indenture of Trust, dated March 1, 1998, between The Industrial
Development Authority of the County of Maricopa and UMB Bank, N.A. (Coral Point
Apartments Project) Series 1998A and 1998B (incorporated herein by reference to
Form 10-Q dated June 30, 1998 filed pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 by America First Apartment Investors, L.P.
(Commission File No. 0-20737)).10.10 Agreement of Purchase and Sale by and between the Company and Gables
Realty Limited Partnership, a Delaware limited partnership, and Gables GP,
Inc., a Texas 35




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##### Table of Contents



corporation (incorporated herein by reference to Form 10-Q dated
September 30, 2004 filed pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 by America First Apartment Investors, Inc. (Commission
File No. 000-49986)).10.11 Asset Purchase Agreement by and between America First PM Group, Inc.,
America First Properties Management Company, L.L.C. and America First
Companies, L.L.C., dated November 8, 2004.21. Subsidiaries of the Company.23.1 Consent of Independent Registered Public Accounting Firm .23.2 Consent of Independent Registered Public Accounting Firm .24 Powers of Attorney.31.1 Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.31.2 Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.32.1 Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.32.2 Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. 36




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of
America First Apartment Investors, Inc. We have audited the accompanying consolidated balance sheet of America First Apartment
Investors, Inc. and subsidiaries (the Company) as of December 31, 2004, and the related
consolidated statements of operations and comprehensive income (loss), stockholders equity, and
cash flows for the year then ended. Our audit also included the financial statement schedule
listed in the Index at Item 15 for the year ended December 31, 2004. These financial statements
and financial statement schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on the financial statements and financial statement
schedule based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). 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 audit provides a reasonable basis for our
opinion. In our opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of America First Apartment Investors, Inc. and subsidiaries as of
December 31, 2004, and the results of their operations and their cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion, such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all material respects, the
information set forth therein. We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Companys internal control over financial
reporting as of December 31, 2004, based on the criteria established in Internal ControlIntegrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated March 21, 2005 expressed an unqualified opinion on managements assessment of the
effectiveness of the Companys internal control over financial reporting and an unqualified opinion
on the effectiveness of the Companys internal control over financial reporting. /s/ DELOITTE & TOUCHE LLP Omaha, Nebraska
March 21, 2005 37




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Report of Independent Registered Public Accounting Firm To the Shareholders
America First Apartment Investors, Inc: We have audited the accompanying consolidated balance sheet of America First Apartment Investors,
Inc. and subsidiaries as of December 31, 2003, and the related consolidated statements of income
and comprehensive income, stockholders equity, and cash flows for the year ended December 31,
2003, and the consolidated statements of income and comprehensive income, partners capital, and
cash flows of America First Apartment Investors, L.P. and subsidiaries for the year ended December
31, 2002. These consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated financial statements
based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). 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. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of America First Apartment Investors, Inc. and
subsidiaries as of December 31, 2003 and the results of their operations and their cash flows for
the year ended December 31, 2003 and the results of operations and cash flows of America First
Apartment Investors, L.P. and subsidiaries for the year ended December 31, 2002 in conformity with
U.S. generally accepted accounting principles. /s/ KPMG LLP Omaha, Nebraska
March 15, 2005 38




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##### Table of Contents



AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts) December 31,
    
    
    December 31,2004
    
    
    2003AssetsCash and cash equivalents
    
    $
    10,634
    
    
    $
    6,918Restricted cash
    
    
    8,039
    
    
    
    3,717Real estate assets:Land
    
    
    37,270
    
    
    
    18,541Buildings
    
    
    245,798
    
    
    
    132,050Total
    
    
    283,068
    
    
    
    150,591Less: accumulated depreciation
    
    
    (42,567
    )
    
    
    (35,693
    )Real estate assets, net
    
    
    240,501
    
    
    
    114,898Investments in agency securities, at fair value
    
    
    26,192
    
    
    
    36,027Investments in corporate equity securities, at fair value
    
    
    4,321
    
    
    
    2,179In-place lease intangibles, net of accumulated amortization of $2,797
    
    
    2,572
    
    
    
    Other assets
    
    
    5,138
    
    
    
    3,153Total Assets
    
    $
    297,397
    
    
    $
    166,892LiabilitiesAccounts payable and accrued expenses
    
    $
    7,039
    
    
    $
    3,036Dividends payable
    
    
    2,628
    
    
    
    1,269Notes payable
    
    
    2,413
    
    
    
    Bonds and mortgage notes payable
    
    
    167,150
    
    
    
    82,215Borrowings under repurchase agreements
    
    
    27,875
    
    
    
    33,012Total liabilities
    
    
    207,105
    
    
    
    119,532Commitments and ContingenciesStockholders EquityCommon stock, $.01 par value; 500,000,000 shares authorized, 10,510,558
and 5,074,897 issued and outstanding
    
    
    105
    
    
    
    51Additional paid-in capital
    
    
    102,766
    
    
    
    47,418Accumulated deficit
    
    
    (12,628
    )
    
    
    (714
    )Accumulated other comprehensive income
    
    
    49
    
    
    
    605Total stockholders equity
    
    
    90,292
    
    
    
    47,360Total Liabilities and Stockholders Equity
    
    $
    297,397
    
    
    $
    166,892
 The accompanying notes are an integral part of the consolidated financial statements. 39




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##### Table of Contents



AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share amount) For the Year Ended December 31,2004
    
    
    2003
    
    
    2002Rental income
    
    $
    35,319
    
    
    $
    24,123
    
    
    $
    24,862Real estate operating expenses
    
    
    (19,879
    )
    
    
    (13,022
    )
    
    
    (12,867
    )Depreciation expense
    
    
    (6,891
    )
    
    
    (5,001
    )
    
    
    (4,964
    )Real estate operating margin
    
    
    8,549
    
    
    
    6,100
    
    
    
    7,031Other incomeInterest income on cash and cash equivalents and agency
securities and dividend income
    
    
    770
    
    
    
    331
    
    
    
    317Gain on Jefferson Place subordinate note
    
    
    
    
    
    
    4,444
    
    
    
    Gain on sales of corporate equity securities
    
    
    212
    
    
    
    
    
    
    
    Other income
    
    
    982
    
    
    
    4,775
    
    
    
    317Other expensesInterest expense
    
    
    5,699
    
    
    
    4,316
    
    
    
    4,324General and administrative expenses
    
    
    3,997
    
    
    
    1,910
    
    
    
    1,773Amortization
expense - in-place lease intangibles
    
    
    2,466
    
    
    
    
    
    
    
    Amortization
expense - debt financing costs
    
    
    253
    
    
    
    288
    
    
    
    261Property management internalization expense
    
    
    5,911
    
    
    
    
    
    
    
    Other expenses
    
    
    18,326
    
    
    
    6,514
    
    
    
    6,358Income (loss) from continuing operations
    
    
    (8,795
    )
    
    
    4,361
    
    
    
    990Income from discontinued operations (including
gain on sale of $5,973)
    
    
    6,030
    
    
    
    
    
    
    
    Net Income (loss)
    
    $
    (2,765
    )
    
    $
    4,361
    
    
    $
    990
    (1)Other comprehensive income (loss):Unrealized holding gains (losses) arising during
the period on securities
    
    
    (556
    )
    
    
    615
    
    
    
    (15
    )Comprehensive income (loss)
    
    $
    (3,321
    )
    
    $
    4,976
    
    
    $
    975Income (loss) from continuing operations, basic and diluted,
per share (per BUC in 2002)
    
    $
    (1.07
    )
    
    $
    0.86
    
    
    $
    0.19Income from discontinued operations, basic and diluted,
per share (per BUC in 2002)
    
    $
    0.73
    
    
    $
    
    
    
    $
    Net income (loss), basic and diluted, per share
(per BUC in 2002)
    
    $
    (0.34
    )
    
    $
    0.86
    
    
    $
    0.19Dividends (distributions in 2002) declared per share
(per BUC in 2002)
    
    $
    1.00
    
    
    $
    1.00
    
    
    $
    1.00Weighted average number of shares outstanding -
basic (BUCs in 2002)
    
    
    8,243
    
    
    
    5,074
    
    
    
    5,023Weighted average number of shares outstanding -
diluted (BUCs in 2002)
    
    
    8,243
    
    
    
    5,076
    
    
    
    5,023
   (1)
    
    Net income from continuting operations and net income allocated to the general partner and the BUC holders was $60 and $930, respectively for the year ended December 31, 2002. The accompanying notes are an integral part of the consolidated financial statements. 40




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##### Table of Contents



AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND PARTNERS CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(in thousands) Distributions
    
    
    AccumulatedAdditional
    
    
    in Excess of
    
    
    OtherGeneral
    
    
    BUC
    
    
    Common
    
    
    Common
    
    
    Paid-In
    
    
    Accumulated
    
    
    ComprehensivePartner
    
    
    holders
    
    
    Shares
    
    
    Stock
    
    
    Capital
    
    
    Earnings
    
    
    Income (Loss)
    
    
    TotalBalance, January 1, 2002
    
    $
    89
    
    
    $
    51,420
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    51,509Net income
    
    
    59
    
    
    
    931
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    990Distributions paid or accrued
    
    
    (51
    )
    
    
    (5,024
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,075
    )Change in net unrealized
holding gains
    
    
    
    
    
    
    (15
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15
    )Balance, December 31, 2002
    
    
    97
    
    
    
    47,312
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47,409Issuance of shares of the
Company in exchange for
BUCs and the General
Partner interest of the
Partnership
    
    
    (97
    )
    
    
    (47,312
    )
    
    
    5,074
    
    
    
    51
    
    
    
    47,368
    
    
    
    
    
    
    
    (10
    )
    
    
    Issuance of common stock
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    12Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,361
    
    
    
    
    
    
    
    4,361Stock option compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38
    
    
    
    
    
    
    
    
    
    
    
    38Change in net unrealized
holding gains
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    615
    
    
    
    615Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,075
    )
    
    
    
    
    
    
    (5,075
    )Balance, December 31, 2003
    
    
    
    
    
    
    
    
    
    
    5,075
    
    
    
    51
    
    
    
    47,418
    
    
    
    (714
    )
    
    
    605
    
    
    
    47,360Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,765
    )
    
    
    
    
    
    
    (2,765
    )Issuance of common stock
    
    
    
    
    
    
    
    
    
    
    5,436
    
    
    
    54
    
    
    
    55,327
    
    
    
    
    
    
    
    
    
    
    
    55,381Stock option compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21
    
    
    
    
    
    
    
    
    
    
    
    21Change in net unrealized
holding losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (556
    )
    
    
    (556
    )Dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,149
    )
    
    
    
    
    
    
    (9,149
    )Balance, December 31, 2004
    
    $
    
    
    
    $
    
    
    
    
    10,511
    
    
    $
    105
    
    
    $
    102,766
    
    
    $
    (12,628
    )
    
    $
    49
    
    
    $
    90,292
 The accompanying notes are an integral part of the consolidated financial statements. 41




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##### Table of Contents



AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands) For the Year Ended December 31,2004
    
    
    2003
    
    
    2002Cash flows from operating activitiesNet income (loss)
    
    $
    (2,765
    )
    
    $
    4,361
    
    
    $
    990Adjustments to reconcile net income (loss) to net cash
provided by operating activitiesDepreciation
    
    
    7,122
    
    
    
    5,001
    
    
    
    4,964Gain on sales of corporate equity securities
    
    
    (212
    )
    
    
    Gain on sale of discontinued operations
    
    
    (5,973
    )
    
    
    Property management internalization expense
    
    
    5,911Gain on Jefferson Place subordinate note
    
    
    
    
    
    
    (4,444
    )Change in fair value of interest rate swap agreements
    
    
    (273
    )
    
    
    11
    
    
    
    (6
    )Amortization of debt financing costs and in-place lease intangibles
    
    
    3,069
    
    
    
    288
    
    
    
    261Amortization of premium on mortgage-backed securities
    
    
    252
    
    
    
    4
    
    
    
    Non-cash stock option compensation
    
    
    21
    
    
    
    38
    
    
    
    Changes in assets and liabilities, net of acquisitions:(Increase) decrease in restricted cash
    
    
    263
    
    
    
    529
    
    
    
    (172
    )(Increase) decrease in other assets
    
    
    387
    
    
    
    (422
    )
    
    
    (752
    )Increase (decrease) in accounts payable and accrued expenses
    
    
    704
    
    
    
    (139
    )
    
    
    (6
    )Net cash provided by operating activities
    
    
    8,506
    
    
    
    5,227
    
    
    
    5,279Cash flows from investing activitiesReal estate capital improvements
    
    
    (1,172
    )
    
    
    (409
    )
    
    
    (663
    )Purchase of agency securities
    
    
    (1,565
    )
    
    
    (36,114
    )
    
    
    Principal received on agency securities
    
    
    11,004
    
    
    
    187
    
    
    
    Acquisition of real estate
    
    
    (4,645
    )
    
    
    
    
    
    
    Proceeds from the sale of real estate
    
    
    11,076
    
    
    
    
    
    
    
    Purchase of corporate equity securities
    
    
    
    
    
    
    
    
    
    
    (1,478
    )Proceeds from the sale of corporate equity securities
    
    
    3,876
    
    
    
    
    
    
    
    Purchase of property management assets
    
    
    (6,898
    )Acquisition of America First Real Estate Investment Partners, L.P.
    
    
    (3,963
    )
    
    
    
    
    
    
    Cash received in acquisition of America First Real Estate
Investment
Partners, L.P.
    
    
    8,400
    
    
    
    
    
    
    
    Net proceeds from repayment of Jefferson Place subordinate note
    
    
    
    
    
    
    2,356
    
    
    
    Net cash provided by (used in) investing activities
    
    
    16,113
    
    
    
    (33,980
    )
    
    
    (2,141
    )Cash flows from financing activitiesDividends (distributions in 2002) paid
    
    
    (7,790
    )
    
    
    (5,074
    )
    
    
    (5,010
    )Principal payments on bonds and mortgage notes payable
    
    
    (1,044
    )
    
    
    (698
    )
    
    
    (656
    )Proceeds from borrowings under repurchase agreements
    
    
    
    
    
    
    33,012
    
    
    
    Principal payments on borrowings under repurchase agreements
    
    
    (12,111
    )
    
    
    
    
    
    
    Issuance of common stock
    
    
    44
    
    
    
    11
    
    
    
    Net cash provided by (used in) financing activities
    
    
    (20,903
    )
    
    
    27,251
    
    
    
    (5,666
    )Net increase (decrease) in cash and cash equivalents
    
    
    3,716
    
    
    
    (1,502
    )
    
    
    (2,528
    )Cash and cash equivalents at beginning of year
    
    
    6,918
    
    
    
    8,420
    
    
    
    10,948Cash and cash equivalents at end of year
    
    $
    10,634
    
    
    $
    6,918
    
    
    $
    8,420Supplemental disclosure of cash flow information:Cash paid during the year for interest
    
    $
    4,882
    
    
    $
    4,669
    
    
    $
    4,356Dividends declared but not paid
    
    
    2,628
    
    
    
    1,269
    
    
    
    1,268Noncash investing and financing activities :Relinquishment of debt in connection with the property disposition
    
    
    8,775
    
    
    
    
    
    
    
    Issuance of shares for AFREZ merger
    
    
    55,338
    
    
    
    
    
    
    
    Assumption of debt in connection with property acquisition
    
    $
    26,150
    
    
    $
    
    
    
    $
    
 The accompanying notes are an integral part of the consolidated financial statements. 42




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##### Table of Contents



AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization America First Apartment Investors, Inc. (the Company) is a Maryland corporation which owns and
operates 29 multifamily apartment projects and an office warehouse facility. The Company also
invests in mortgage-backed securities and other real estate assets. The Company is treated as a Real Estate Investment Trust (REIT) for Federal income tax purposes.
As a REIT, the Company is generally not subject to Federal income taxes on distributed income. To
maintain qualification as a REIT, the Company must meet a number of organizational and operational
requirements, including a requirement to distribute at least 90% of the REITs ordinary taxable
income to shareholders. The Company is the successor in interest to America First Apartment Investors, L.P. (the
Partnership) which merged with and into the Company as of January 1, 2003. Prior to that time
the Company had no material assets or business operations. As a result of this merger, the Company
assumed the assets, liabilities and business operations of the Partnership. Accordingly, all
operations and financial results of the Company described in its consolidated financial statements
and the notes thereto for periods prior to January 1, 2003 are those of the Partnership. In
addition, on June 3, 2004, America First Real Estate Investment Partners, L.P. (AFREZ) merged
with and into the Company as more fully described in Note 3. As a result of this merger, the
Company acquired the assets, assumed the liabilities and business operations of AFREZ. 2. Summary of Significant Accounting Policies  A)
    Financial Statement PresentationThe consolidated financial statements include the accounts of the Company and its
subsidiaries. All significant intercompany transactions and accounts have been eliminated in
consolidation.The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates.B)
    Cash and Cash EquivalentsCash and cash equivalents include highly liquid investments with maturities of three months
or less when purchased.C)
    Restricted CashRestricted cash, which is legally restricted to use, is comprised of resident security
deposits, required maintenance reserves, escrowed funds and collateral for various interest
rate swap agreements.D)
    Investment in Agency Securities and Corporate Equity SecuritiesThe Company accounts for its investments in securities in accordance with Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities(SFAS 115), and has classified its investments in securities as
available-for-sale. 43




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AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued  Securities are carried at fair market value, with unrealized gains and losses reported in
stockholders equity as a component of other comprehensive income. Fair value is determined
by reference to broker quotes.Premiums paid to acquire mortgage-based securities are amortized using the effective yield
method over the life of the related mortgage pool.Security transactions are recorded on the trade date and realized gains or losses on security
sales are based upon the specific identification method.Interest income is recorded as earned and dividend income is recorded on the ex-dividend
date.E)
    Investment in Real EstateThe Companys investment in real estate is carried at cost less accumulated depreciation.
Depreciation of real estate is based on the estimated useful life of the related asset,
generally 27-1/2  40 years on multifamily residential apartment buildings and 31-1/2 years
on commercial buildings and five to fifteen years on capital improvements and is calculated
using the straight-line method. Depreciation of capital improvements on the Companys
commercial property is based on the term of the related tenant lease using the straight-line
method. Maintenance and repairs are charged to expense as incurred, while significant
improvements, renovations and replacements are capitalized.Management reviews each property for impairment at least annually and whenever events or
changes in circumstances indicate that the carrying value of a property may not be
recoverable. The review of recoverability is based upon comparing the carrying value of each
real estate property to the sum of its estimated undiscounted future cash flows. If
impairment exists due to the inability to recover the carrying value of a property, an
impairment loss is recorded to the extent that the carrying value of the property exceeds its
estimated fair value. There were no impairment losses incurred and/or recorded in any of the
years ended December 31, 2004, 2003 and 2002.The Company allocates the purchase price of property acquisitions to the acquired tangible assets,
including land, buildings and identifiable intangible assets based on the fair value of those
assets and liabilities. Identifiable intangible assets include the value of in-place leases.The fair value of the tangible assets is determined based on the assumption that the building is
vacant. In-place lease intangibles arise as a result of the allocation of the total acquisition
costs whereby the Company allocates a portion of the total acquisition cost of a property acquired
to leases in existence as of the date of acquisition. The estimated valuation of in-place leases is
calculated by applying a risk-adjusted discount rate to the projected cash flow realized at each
property during the estimated lease-up period it would take to lease these properties. This
allocated cost is amortized over the average remaining term of the leases (approximately twelve
months).F)
    Debt Financing CostsDebt financing costs are capitalized and amortized on a straight-line basis over the stated
life of the term of the related debt which approximates the effective yield method. Debt
financing costs of approximately $769,000 and $998,000 are included in Other assets on the
Companys Consolidated Balance Sheets as of December 31, 2004 and 2003, respectively. These
costs are net of accumulated amortization of $1.5 million and $1.4 million as of December 31,
2004 and 2003, respectively.G)
    Borrowings under Repurchase AgreementsThe Company finances the acquisition of its Agency Securities through the use of repurchase
agreements. Under these repurchase agreements, the Company sells securities to a lender and
agrees to repurchase the same or similar securities in the future for a price that is higher
than the original sales price. The difference between the sales price that the Company
receives and the repurchase price that the Company pays represents interest paid to the
lender. Although structured as a sale and repurchase obligation, a repurchase agreement
operates as a financing under which the Company pledges its securities as collateral to
secure a loan which is equal in value to a specified percentage of the estimated fair value
of the pledged collateral. The Company retains beneficial ownership of the pledged
collateral. At the maturity of the repurchase agreement, the Company is required to repay the
loan and concurrently 44




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AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued  receives back its pledged collateral from the lender or, with the consent of the lender, the
Company may renew such agreement at the then prevailing financing rate. These repurchase
agreements may require the Company to pledge additional assets to the lender in the event the
estimated fair value of the existing pledged collateral declines.H)
    Revenue Recognition on Investment in Real EstateThe Company leases multifamily rental units under operating leases with terms of one year or
less. Rental revenue is recognized, net of rental concessions, on a straight-line method over
the related lease term. Rental income on commercial property is recognized on a straight-line
basis over the term of each operating lease.I)
    Income TaxesThe Company operates as, and has elected to be taxed as, a REIT under the Internal Revenue
Code. To qualify as a REIT, the Company must meet a number of organizational and operational
requirements, including a requirement to distribute at least 90% of adjusted taxable income
to common shareholders. The Company intends to adhere to these requirements and maintain the
REIT status. As a REIT, the Company is generally not subject to corporate level federal or
state income tax on taxable income distributed currently to shareholders. If the Company
fails to qualify as a REIT in any taxable year, it will be subject to federal and state
income taxes at regular corporate rates (including any applicable alternative minimum tax)
and may not be able to qualify as a REIT for four subsequent taxable years. Even though the
Company qualifies for taxation as a REIT, it may be subject to certain state and local taxes
on income and property, and to federal income and excise taxes on undistributed taxable
income.Taxable income differs from income for financial statement purposes, primarily due to
differences for tax purposes in the estimated useful lives and methods used to compute
depreciation and the carrying value (basis) of the investment in properties. The following
table reconciles income (loss) as reflected in our financial statements to REIT taxable
income for 2004 and 2003 (in thousands): 2004
    
    
    2003Net income (loss) per financial statements
    
    $
    (2,765
    )
    
    $
    4,361Reconciling items:Add differences in deductions for depreciation and amortization
    
    
    2,550
    
    
    
    131Add (less) basis difference for assets acquired or disposed
    
    
    5,587
    
    
    
    (1,706
    )Less tax exempt interest income
    
    
    
    
    
    
    (2,740
    )Other book/tax differences (net)
    
    
    (166
    )
    
    
    12Taxable income subject to the dividend requirement
    
    
    5,206
    
    
    
    58Minimum dividend required (90% of taxable income)
    
    $
    4,685
    
    
    $
    52
 45




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AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued  The actual tax deduction for dividends taken, and the taxability of dividends to
shareholders, is based on a measurement of earnings and profits as defined by the Internal
Revenue Code. Earnings and profits differ from regular taxable income, primarily due to
further differences in the estimated useful lives and methods used to compute depreciation.
The following table reconciles the dividends paid deduction taken by the Company (the portion
of dividends paid that are taxable as ordinary income to shareholders) on its tax returns to
cash dividends paid (in thousands): 2004
    
    
    2003Common dividends paid:Ordinary dividends
    
    $
    7,246
    
    
    $
    3,806Return of capital
    
    
    544
    
    
    
    Total dividends paid
    
    $
    7,790
    
    
    $
    3,806
  J)
    Discontinued OperationsUnder SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets,the results
of operations for properties sold during the period or classified as held for sale at the end
of the current period are required to be classified as discontinued operations in the current
and prior periods. The property-specific components of net earnings that are classified as
discontinued operations include rental revenue, rental expense, real estate tax, depreciation
expense and interest expense. The net gain or loss on the eventual disposal of the held for
sale properties is also required to be classified as discontinued operations.K)
    Net Income (Loss) per share (per BUC in 2002)Net income per share or BUC is based on the weighted average number of shares or BUCs
outstanding during each year presented. Diluted net income per share includes shares issuable
upon exercise of outstanding stock options where the conversion of such instruments would be
dilutive. The Partnership did not issue options to acquire BUCs.L)
    Derivative Instruments and Hedging ActivitiesThe Company accounts for its derivative and hedging activities in accordance with SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires the
recognition of all derivative instruments as assets or liabilities in the Companys
Consolidated Balance Sheets and measurement of these instruments at fair value. The
accounting treatment is dependent upon whether or not a derivative instrument is designated
as a hedge and, if so, the type of hedge. The change in fair value of freestanding derivative
instruments is recognized in earnings in the absence of a specific hedge designation. The
Company is exposed to loss should a counterparty to its derivative instruments default,
however, the Company does not anticipate any defaults.The Company has entered into interest rate swap and cap agreements, as described in Note 16,
to manage its exposure to changes in interest rates. Such interest rate swap and cap
agreements do not have a specific hedge designation under SFAS No. 133, and therefore the
change in fair value is recognized in earnings. The fair value of the interest rate swap and
cap agreements are determined based upon current fair values as quoted by recognized dealers. 46




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AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued  M)
    ReclassificationsCertain amounts from the prior year have been reclassified to conform with the current year
presentation. 3. Merger On May 26, 2004, the shareholders of the Company approved a merger with America First Real Estate
Investment Partners, L.P. (AFREZ), pursuant to the Agreement and Plan of Merger entered into by
the Company and AFREZ on November 25, 2003 (the Merger Agreement). The merger became effective on
June 3, 2004. As a result of the merger, AFREZ was merged with and into the Company. The Company
was the surviving entity and assumed all of the assets, liabilities and business operations of
AFREZ, including 14 multifamily apartment properties containing 2,783 rental units located in
Arizona, Florida, Illinois, Michigan, North Carolina, Ohio, Tennessee and Virginia. The Company issued shares of its common stock and paid cash to the holders of the limited partner
and general partner interests in AFREZ upon consummation of the merger. Each Unit representing an
assigned limited partnership interest in AFREZ as of the date of the merger was converted into the
right to receive 0.7910 shares of the common stock of the Company and a cash payment of $0.39 per
Unit. Fractional shares were rounded up or down to the nearest whole number. A total of 5,376,353
shares of the common stock of the Company were issued to Unit holders in connection with the merger
plus a cash payment of $2.7 million. The general partners 1% interest in AFREZ was converted into
54,308 shares of the common stock of the Company plus a cash payment of $27,000. Pursuant to SFAS No. 141, Business Combinations, the Company allocates a portion of the total
acquisition cost of a property acquired to leases in existence as of the date of acquisition. The
estimated valuation of in-place leases is calculated by applying a risk-adjusted discount rate to
the projected cash flow deficit at each property during the lease-up of these properties. This
allocated cost is amortized over the average remaining term of the leases (approximately twelve
months). The following table summarizes the estimated fair value of AFREZ assets acquired and liabilities
assumed at the date of the merger and the total value of the merger consideration. The following
purchase price allocations have been preliminarily calculated as of June 1, 2004 and may change for
up to one year subsequent to the acquisition date pending the Companys review and valuation
procedures of the assets acquired and the liabilities assumed (in thousands): 47




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AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued Cash and cash equivalentsUnrestricted
    
    $
    8,400Restricted
    
    
    3,616Investments in mortgage-backed securities
    
    
    97Investments in corporate equity securities
    
    
    5,973Investments in real estate
    
    
    115,856In-place lease intangibles
    
    
    4,839Other assets
    
    
    1,317Total assets acquired
    
    
    140,098Accounts payable and accrued expenses
    
    
    2,823Notes payable
    
    
    2,413Bonds and mortgage notes payable
    
    
    68,586Borrowings under repurchase agreements
    
    
    6,975Total liabilities assumed
    
    
    80,797Net assets acquired
    
    $
    59,301Cash paid and direct expenses
    
    $
    3,963Common stock issued
    
    
    55,338Value of merger consideration
    
    $
    59,301
 The following unaudited, pro-forma financial information assumes the AFREZ acquisition occurred at
the beginning of 2003. The most significant adjustments to the periods presented is the inclusion
of AFREZs results for the entire periods presented in addition to the amortization expense related
to in-place lease intangibles being reflected in 2003 rather than in 2004. These results have been
prepared for comparative purposes only and do not purport to be indicative of what would have
occurred had the acquisition been made at the beginning of 2003, or the results which may occur in
the future (in thousands): For the
    
    
    For theYear Ended
    
    
    Year EndedDec. 31, 2004
    
    
    Dec. 31, 2003Total rental income
    
    $
    45,636
    
    
    $
    43,680Net income
    
    $
    144
    
    
    $
    7,677Net income per share, bas ic and diluted
    
    $
    0.01
    
    
    $
    0.73
 48




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AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued 4. Acquisition of Property On December 22, 2004, the Company acquired all of the outstanding membership interests in a newly
formed Tennessee limited liability company, Arbor Knoll-Crest, LLC from Gables Realty Limited
Partnership, a Delaware limited partnership and Gables GP, Inc., a Texas corporation. The sole
asset of Arbor Knoll-Crest, LLC is a 548-unit apartment complex in Antioch, Tennessee now known as
Arbor Hills (the Property). Immediately prior to the formation of Arbor Knoll-Crest LLC, the
Property had been owned by Gables-Tennessee Properties, L.L.C., a Tennessee limited liability
company (GTP). There are no material relationships between the Company and Gables Realty Limited
Partnership, Gables GP, Inc. or GTP. The purchase price for the membership interests in Arbor Knoll-Crest LLC was $29.7 million, $26.1
million of which was paid through the assumption of existing tax-exempt mortgage debt on the
Property, approximately $3.0 million of which was paid in cash, and approximately $550,000 of which
was paid through various expense prorations. 5. Investments in Securities The following table presents the components of the carrying value of the Companys investments in
securities as of December 31, 2004 and 2003 (in thousands): Gross
    
    
    GrossUnrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value2004:Agency Securities
    
    $
    26,328
    
    
    $
    4
    
    
    $
    (140
    )
    
    $
    26,192Corporate Equity Securities
    
    
    4,136
    
    
    
    185
    
    
    
    
    
    
    
    4,3212003:Agency Securities
    
    $
    35,923
    
    
    $
    104
    
    
    $
    
    
    
    $
    36,027Corporate Equity Securities
    
    
    1,678
    
    
    
    501
    
    
    
    
    
    
    
    2,179
 The Companys cost of Agency Securities reflects the amortized cost of the securities. The
various pools making up the Companys investments in Agency Securities have stated rates ranging
from 3.77% to 7.50% and various principal maturities. The Agency Securities serve as collateral
for approximately $20.9 million of borrowings under repurchase agreements. As of December 31, 2003, the Companys investment in corporate equity securities consisted of
238,428 units of AFREZ. The general partner of AFREZ was an affiliate of the Company. The AFREZ
units owned by the Company represented approximately 3.5% of the AFREZ units outstanding. These
units were sold in 2004 prior to the merger with AFREZ. None of the securities available for sale have been in a continuous loss position for 12 months or
longer. The unrealized losses associated with the Agency Securities result from increases in
interest rates and are not due to the credit quality of the investment securities. 49




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AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued 6. Investments in Real Estate The Companys investments in real estate as of December 31, 2004 are comprised of the following (in
thousands): Building
    
    
    Carrying
    
    
    CarryingNumber
    
    
    
    
    
    
    and
    
    
    Value at
    
    
    Value atProperty Name
    
    Location
    
    of Units
    
    
    Land
    
    
    Improvements
    
    
    Dec. 31, 2004
    
    
    Dec. 31, 2003Arbor Hills  (1)
    
    Antioch, TN
    
    
    548
    
    
    $
    4,400
    
    
    $
    25,336
    
    
    $
    29,736
    
    
    $
    Belvedere Apartments  (1)
    
    Naples , FL
    
    
    162
    
    
    
    956
    
    
    
    8,338
    
    
    
    9,294
    
    
    
    9,299Bluff Ridge Apartments
    
    Jacksonville, NC
    
    
    108
    
    
    
    203
    
    
    
    3,501
    
    
    
    3,704
    
    
    
    Brentwood Oaks Apartments  (1)
    
    Nashville, TN
    
    
    262
    
    
    
    2,000
    
    
    
    9,837
    
    
    
    11,837
    
    
    
    Coral Point Apartments  (1)
    
    Mesa, AZ
    
    
    337
    
    
    
    2,240
    
    
    
    9,204
    
    
    
    11,444
    
    
    
    11,335Covey at Fox Valley (1)
    
    Aurora, IL
    
    
    216
    
    
    
    1,320
    
    
    
    10,499
    
    
    
    11,819
    
    
    
    11,640Delta Crossing
    
    Charlotte, NC
    
    
    178
    
    
    
    800
    
    
    
    5,031
    
    
    
    5,831
    
    
    
    Elliots Crossing Apartments  (1)
    
    Tempe, AZ
    
    
    247
    
    
    
    1,301
    
    
    
    9,703
    
    
    
    11,004
    
    
    
    Fox Hollow Apartments  (1)
    
    High Point, NC
    
    
    184
    
    
    
    1,000
    
    
    
    5,148
    
    
    
    6,148
    
    
    
    Greenbriar Apartments  (1)
    
    Tulsa , OK
    
    
    120
    
    
    
    648
    
    
    
    3,794
    
    
    
    4,442
    
    
    
    4,410Highland Park Apartments  (1)
    
    Columbus, OH
    
    
    252
    
    
    
    1,562
    
    
    
    6,319
    
    
    
    7,881
    
    
    
    The Hunt Apartments  (1)
    
    Oklahoma City, OK
    
    
    216
    
    
    
    550
    
    
    
    7,061
    
    
    
    7,611
    
    
    
    7,641Huntsview Apartments  (1)
    
    Greensboro, NC
    
    
    240
    
    
    
    1,845
    
    
    
    6,590
    
    
    
    8,435
    
    
    
    Jackson Park Place Apartments  (1)
    
    Fresno, CA
    
    
    296
    
    
    
    1,400
    
    
    
    10,901
    
    
    
    12,301
    
    
    
    12,291Lakes of Northdale Apartments  (1)
    
    Tampa, FL
    
    
    216
    
    
    
    1,553
    
    
    
    8,454
    
    
    
    10,007
    
    
    
    Littlestone of Village Green  (1)
    
    Gallatin, TN
    
    
    200
    
    
    
    621
    
    
    
    9,981
    
    
    
    10,602
    
    
    
    10,551Misty Springs Apartments  (1)
    
    Daytona Beach, FL
    
    
    128
    
    
    
    742
    
    
    
    3,831
    
    
    
    4,573
    
    
    
    Monticello Apartments  (1)
    
    Southfield, MI
    
    
    106
    
    
    
    565
    
    
    
    5,283
    
    
    
    5,848
    
    
    
    Oakhurst Apartments  (1)
    
    Ocala, FL
    
    
    214
    
    
    
    847
    
    
    
    8,419
    
    
    
    9,266
    
    
    
    9,256Oakwell Farms Apartments  (1)
    
    Nashville, TN
    
    
    414
    
    
    
    1,946
    
    
    
    16,183
    
    
    
    18,129
    
    
    
    18,125Park at Countryside (1)
    
    Port Orange, FL
    
    
    120
    
    
    
    647
    
    
    
    2,607
    
    
    
    3,254
    
    
    
    3,274The Park at 58 Apartments (1)
    
    Chattanooga, TN
    
    
    196
    
    
    
    231
    
    
    
    4,270
    
    
    
    4,501
    
    
    
    4,456Park Trace Apartments  (1)
    
    Norcross, GA
    
    
    260
    
    
    
    2,246
    
    
    
    11,888
    
    
    
    14,134
    
    
    
    14,107The Ponds at Georgetown  (1)
    
    Ann Arbor, MI
    
    
    134
    
    
    
    653
    
    
    
    6,846
    
    
    
    7,499
    
    
    
    The Retreat (1)
    
    Atlanta, GA
    
    
    226
    
    
    
    1,800
    
    
    
    7,401
    
    
    
    9,201
    
    
    
    9,153St. Andrews at Westwood (1)
    
    Orlando, FL
    
    
    259
    
    
    
    1,617
    
    
    
    14,239
    
    
    
    15,856
    
    
    
    15,900Shelby Heights (1)
    
    Bristol, TN
    
    
    100
    
    
    
    175
    
    
    
    2,953
    
    
    
    3,128
    
    
    
    3,128Watermans Crossing (1)
    
    Newport News, VA
    
    
    260
    
    
    
    1,620
    
    
    
    12,726
    
    
    
    14,346
    
    
    
    Waters Edge Apartments
    
    Lake Villa, IL
    
    
    108
    
    
    
    486
    
    
    
    4,621
    
    
    
    5,107
    
    
    
    The Exchange at Palm Bay  (1)
    
    Palm Bay, FL
    
    
    72,002
    (2)
    
    
    1,296
    
    
    
    4,834
    
    
    
    6,130
    
    
    
    6,025283,068
    
    
    
    150,591Less accumulated depreciation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (42,567
    )
    
    
    (35,693
    )Balance at end of year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    240,501
    
    
    $
    114,898
   (1)
    
    Property is encumbered as described in Note 8.(2)
    
    This is an office/warehouse facility. The figure represents square feet available
for lease to tenants. 50




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AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued Reconciliation of the carrying value of the investment in real estate is as follows (in
thousands): For the
    
    
    For the
    
    
    For theYear Ended
    
    
    Year Ended
    
    
    Year EndedDec. 31, 2004
    
    
    Dec. 31, 2003
    
    
    Dec. 31, 2002Balance at beginning of year
    
    $
    114,898
    
    
    $
    119,490
    
    
    $
    123,791Merger of properties
    
    
    115,856
    
    
    
    
    
    
    
    Disposition of Glades
    
    
    (14,056
    )
    
    
    
    
    
    
    Acquistion of Arbor Hills
    
    
    29,736
    
    
    
    
    
    
    
    Capital improvements
    
    
    1,172
    
    
    
    409
    
    
    
    663Depreciation
    
    
    (7,105
    )
    
    
    (5,001
    )
    
    
    (4,964
    )Balance at end of year
    
    $
    240,501
    
    
    $
    114,898
    
    
    $
    119,490
 7. Jefferson Place Subordinate Note During the second quarter of 2003, the Company recorded a gain of $4.4 million resulting from the
repayment of its subordinate note due from the owners of Jefferson Place Apartments. The note was
repaid out of the sale proceeds of Jefferson Place Apartments. The total gain is comprised of $2.7
million of cash proceeds from the sale less $300,000 of written off receivables for a net cash gain
of $2.4 million. The Company also recorded a $2.1 million non-cash gain representing the reversal
of a loss reserve. The subordinate note due from the owners of Jefferson Place Apartments had an
original principal value of $3.5 million, a net book value of $0, and was received by the
Partnerships predecessor in 1997 in connection with the re-issuance of the Jefferson Place
tax-exempt bonds which were originally owned by the Partnerships predecessor. The subordinate note
represented unpaid tax-exempt interest and principal on the original bonds. In connection with the
1997 re-issuance, the Partnerships predecessor also issued a guarantee of the re-issued bonds that
was collateralized by one of its other properties and recorded a loss reserve of $2.1 million for
the guarantee. The loss reserve represented managements best estimate of the potential collateral
guarantee loss based upon the estimated fair values of the respective properties at the inception
of the collateral guarantee and was reversed on June 26, 2003, when the Company was relieved of its
collateral guarantee via the sale of Jefferson Place. 8. Bonds and Mortgage Notes Payable The Company has financed its multifamily apartment properties and its commercial property with
long-term mortgage debt consisting of thirteen tax-exempt bond financings and seven taxable
mortgage notes. Each debt obligation is secured by a first mortgage or deed of trust on the
property. Bonds and mortgage notes payable as of December 31, 2004 and 2003 consist of the
following (dollars in thousands): 51




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AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued Effective
    
    
    
    
    
    
    
    
    Carrying AmountInterest
    
    
    Maturity
    
    Payment and
    
    Annual
    
    December 31,Collateral
    
    Rate
    
    
    Date
    
    Prepayment or Redemption Terms
    
    Payments
    
    2004
    
    
    2003Bonds Payable:Coral Point and St. Andrews at Westwood Apartments
    
    
    4.96
    %
    
    03/01/2008
    
    Semiannual payment of interest due each March 1 and September 1. Prepayable at par + 1% in March 2006.
    
    interest only
    
    $
    13,090
    
    
    $
    13,090Covey at Fox Valley and Park Trace Park Trace Apartments
    
    
    5.30
    %
    
    11/01/2007
    
    Semiannual payment of interest
due each May 1 and November 1. Prepayable at par + 1% in March 2006.
Prepayable at par in March 2007.
    
    interest only
    
    
    12,410
    
    
    
    12,410Brentwood Oaks Apartments
    
    
    2.18
    %(1)
    
    07/15/2031
    
    Monthly payment of interest due on the 12th of each month. Prepayable at anytime
    
    interest only
    
    
    11,320
    
    
    
    Lakes of Northdale Apartments
    
    
    2.57
    %(2)
    
    05/15/2012
    
    Monthly payment of interest due on the 11th of each month. Prepayable at anytime
    
    interest only
    
    
    9,610
    
    
    
    Jackson Park Place
    
    
    5.80
    %
    
    12/01/2027
    
    Monthly payment of principal and interest due the 1st of each month. Prepayable at par in November 2007.
    
    $599
    
    
    7,596
    
    
    
    7,750The Hunt Apartments
    
    
    3.30
    %(3)
    
    07/01/2029
    
    Semiannual payment of interest due each Jan. 1 and July 1. Prepayable at anytime.
    
    interest only
    
    
    6,930
    
    
    
    6,930Oakhurst Apartments
    
    
    2.33
    %(4)
    
    12/01/2007
    
    Semiannual payment of interest due each June 1 and Dec. 1. Prepayable at par s ince December 2003.
    
    interest only
    
    
    5,300
    
    
    
    5,300The Exchange at Palm Bay
    
    
    2.33
    %(4)
    
    11/01/2010
    
    Monthly payment of principal and interest due the 25th of each month. Prepayable at par in December 2005.
    
    $499
    
    
    5,153
    
    
    
    5,256Belvedere Apartments
    
    
    2.33
    %(4)
    
    12/01/2007
    
    Semiannual payment of interest due each June 1 and Dec. 1. Prepayable at par s ince December 2003.
    
    interest only
    
    
    4,800
    
    
    
    4,800Greenbriar Apartments
    
    
    3.30
    %(3)
    
    07/01/2029
    
    Semiannual payment of interest due each Jan. 1 and July 1. Prepayable at anytime.
    
    interest only
    
    
    3,980
    
    
    
    3,980Shelby Heights and Park at Countryside
    
    
    6.10
    %
    
    03/01/2022
    
    Semiannual payment of principal and/or interest due each March 1 and September 1. Prepayable at par + 1% in March 2007.
    
    range from
    
    
    2,855
    
    
    
    2,990Arbor Hills
    
    
    2.65
    %(6)
    
    12/01/2025
    
    Monthly payment of interest due the 1st of each month. Prepayable at anytime.
    
    interest only
    
    
    26,150
    
    
    
    The Park at Fifty Eight
    
    
    6.65
    %
    
    03/01/2021
    
    Semiannual payment of principal and/or interest due each March 1 and September 1. Prepayable at par + 1% in March 2006.
    
    range from
    
    
    2,255
    
    
    
    2,325$220 to$225$
    111,449
    
    
    $
    64,831
 52




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AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued Effective
    
    
    
    
    
    
    
    
    Carrying AmountInterest
    
    
    Maturity
    
    Payment and
    
    Annual
    
    December 31,Collateral
    
    Rate
    
    
    Date
    
    Prepayment or Redemption Terms
    
    Payments
    
    2004
    
    
    2003Mortgage Notes Payable:Oakwell
Farms
Apartments
    
    
    6.935
    %
    
    05/01/2009
    
    Monthly payment of principal and interest due the 1st of each
 month. Prepayment allowed with 30 days notice and premium
    
    $1,029
    
    
    12,097
    
    
    
    12,280Watermans
Crossing
    
    
    5.52
    %
    
    11/01/2012
    
    Monthly payment of principal and interest due on the 1st of
each month. Prepayment allowed with 30 days notice
    
    $790
    
    
    10,859
    
    
    
    Elliots
Crossing
Apartments
    
    
    2.82
    %(5)
    
    02/01/2014
    
    Semiannual payment of interest due each April 1 and October 1.
 Prepayable at par +1.5% in April 2009
    
    $540

    
    
    8,140
    
    
    
    Huntsview

Apartments
    
    
    5.83
    %
    
    01/01/2012
    
    Monthly payment of principal and
interest due on the 1st of each month. Prepayment allowed with 30
days notice
    
    $509
    
    
    7,112
    
    
    
    Highland
Park
Apartments
    
    
    4.69
    %
    
    09/01/2013
    
    Monthly payment of principal and
interest due on the 1st of each month. Prepayment allowed with 30 days notice
    
    $435
    
    
    6,502
    
    
    
    Fox
Hollow
Apartments
    
    
    6.91
    %
    
    03/01/2011
    
    Monthly payment of principal and
interest due on the 1st of each month. Prepayment allowed with 30
days notice
    
    $493
    
    
    6,043
    
    
    
    Littlestone
at
Village Green
    
    
    7.68
    %
    
    09/15/2005
    
    Monthly payment of principal and interest due the 15th of each
month. Prepayment allowed with 30 days notice and premium.
    
    $543
    
    
    4,948
    
    
    
    5,104$
    55,701
    
    
    $
    17,384$
    167,150
    
    
    $
    82,215
   (1)
    
    Bond payable bears interest at a highly rated bond composite variable rate that
is reset weekly and capped at 9.27%, the rate at 12/31/2004 was 2.01%, averaged for the year of
2.18%.(2)
    
    Bond payable bears interest at a highly rated bond composite variable rate that is
reset weekly and capped at 7.50%, the rate at 12/31/2004 was 2.01%, averaged for the year of 2.57%.(3)
    
    In June 2004, the Company entered into an interest rate swap transaction which fixed
the rates on the bonds to 3.30% through June 2009.(4)
    
    The interest rate on these bonds is variable based upon the BMA average rate plus
0.65%.(5)
    
    The Company entered into an interest rate swap transactions that fix the rates on
the bond to 2.82%. The interest rate swap agreements will terminate in June 2009.(6)
    
    Bond payable bears interest at a highly rated bond composite variable rate
that is reset weekly and capped at 12.00%, the rate at 12/31/2004 was 2.01%, average for the period
held the bond was 2.65%. Accrued interest of $1.7 million and $700,000 as of December 31, 2004 and 2003, respectively
is included in Accounts payable and accrued expenses on the Companys Consolidated Balance Sheets. 9. Borrowings under Repurchase Agreements The Company has financed the acquisition of its Agency Securities through short-term repurchase
agreements. Borrowings under repurchase agreements as of December 31, 2004 and 2003 consisted of
the following (dollars in thousands): 53




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AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued Interest
    
    Maturity
    
    
    
    Carrying AmountCollateral
    
    Rate
    
    Date
    
    Payment Schedule
    
    Dec. 31, 2004
    
    Dec. 31, 2003Repurchase agreements collateralized by agency securities:FNMA Pool #759197
    
    
    2.36
    %
    
    09/13/2005
    
    Interest payments
and principal due
at maturity
    
    $
    16,400
    
    
    $
    20,668FNMA Pool #670676
    
    
    1.99
    %
    
    04/25/2005
    
    Interest payments
and principal due
at maturity
    
    
    4,500
    
    
    
    12,344Other repurchase agreements:
    
    
    
    
    
    
    
    
    
    
    20,900
    
    
    
    33,012The Ponds at Georgetown
GNMA Certificate
    
    
    2.42
    %
    
    06/28/2005
    
    Interest payments
due quarterly,
principal due at
maturity
    
    
    6,975
    
    
    $
    27,875
    
    
    $
    33,012
 Accrued interest of approximately $184,000 and approximately $23,000 as of December 31, 2004
and 2003 is included in Accounts payable and accrued expenses on the Companys Consolidated Balance
Sheets. The Company intends to renew its repurchase agreements which come due in 2005 with repurchase
agreements having similar terms. 10. Notes Payable Notes payable were acquired as a result of the AFREZ merger. The notes bear interest at the rate
equal to 120% of the annual applicable federal rate for debt instruments with a term of not over
three years as determined by the Internal Revenue Code and applicable regulations thereunder. As of
December 31, 2004, such rate was 2.94%. The annual interest rate on the Notes is calculated by
averaging such interest rates for each month. Such rate averaged 2.73% from the acquisition date to
December 31, 2004. The Notes provide for annual installments of accrued interest payable on the
15th of each January, beginning January 15, 2005. The unpaid principal balance and accrued but
unpaid interest is due January 15, 2008. The Company may, at its option, redeem all or any portion of the Notes at any time at a price equal
to 100% of the outstanding principal balance of the Notes together with accrued interest to the
date fixed for redemption. The Company is required to use 80% of the net proceeds, as defined in
the indenture of trust related to such Notes, from sales or refinancings of assets of the Company
that were owned by Cap Source I or Cap Source II prior to the AFREZ merger to prepay the Notes. The
Company is required to deposit such proceeds into a segregated trust account established under the
indenture, and when the funds in the account equal or exceed $5 million, the proceeds will be used
to redeem the Notes as provided in the indenture. 54




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AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued 11. Aggregate Borrowings As of December 31, 2004, the Companys aggregate borrowings are $197.4 million with maturities over
the next five years and thereafter as follows (in thousands): PrincipalMaturity
    
    Amount2005
    
    $
    33,8752006
    
    
    1,1202007
    
    
    23,7072008
    
    
    16,7752009
    
    
    12,323Thereafter
    
    
    109,638$
    197,438
 12. Commitments and Contingencies On December 3, 2003, a purported class action lawsuit was filed in the Delaware Court of Chancery
against AFREZ, along with its general partner and America First Companies L.L.C. (America First).
The plaintiffs seek to have the lawsuit certified as a class action on behalf of all Units holders.
The lawsuit alleges, among other things, that the defendants acted in violation of their fiduciary
duties to the Unit holders in connection with the merger of AFREZ with and into the Company. The
merger of AFREZ with and into the Company was completed on June 3, 2004 and, as a result, the
Company assumed all liabilities of AFREZ, including any liability that may be imposed as a result
of this lawsuit. To date, the plaintiffs have not amended their complaint
to formally name the Company as a defendant or to modify the relief they are seeking. The Company
intends to defend this lawsuit vigorously, but is unable to predict the outcome of this litigation. The Company is subject to various legal proceedings and claims that arise in the ordinary course of
business. These matters are frequently covered by insurance. If it has been determined that a loss
is probable to occur, the estimated amount of the loss is expensed in the financial statements.
While the resolution of these matters cannot be predicted with certainty, management believes the
final outcome of such matters will not have a material adverse effect on the financial position or
results of operations of the Company. 13. Transactions with Related Parties The Company engaged in the following transactions with affiliated parties during 2004. The Company amended its Advisory Agreement (the Agreement) with America First Apartment Advisory
Corporation (the Advisor) on June 3, 2004 which includes the following provisions: (i) the
Advisor will administer the day-to-day operations of the Company; (ii) the Advisor will act as the
authorized agent on behalf of the Company in connection with the identification, evaluation,
purchase, financing, operation and disposition of all real estate assets; (iii) the Advisor will
provide the executive and administrative personnel and services required for the operation of the
Company; (iv) the Advisor will maintain the financial records and perform the financial reporting
of the Company; and (v) the Advisor will monitor and provide information to the Board of Directors
on an on-going basis. In connection with these services, the Company pays the following
administrative fees to the Advisor: 55




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AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued Administrative Fee  General This fee is equal to 0.55% per annum of the sum of: (i) the original principal amount of the
bonds originally issued to the predecessor to the Partnership; (ii) the purchase price paid
by the Company for new assets that are then held by the Company; (iii) the outstanding
principal of mezzanine financing provided by the Company to unaffiliated developers of
residential real estate, plus (iv) the fair value of the AFREZ properties on the date of the
merger. Prior to the amendment, this fee was equal to 0.60% per annum of the sum of: (i) the
original principal amount of the bonds originally issued to the predecessor to the
Partnership; (ii) the purchase price paid by the Company for new assets that are then held by
the Company; plus (iii) the outstanding principal of mezzanine financing provided by the
Company to unaffiliated developers of residential real estate. However, the fee was to be
reduced to 0.50% per annum of those amounts in excess of $250 million for any calendar year
in which the Company generated Funds from Operations (FFO) of less than $1.60 per average
common share outstanding. Such fees were $1.2 million, $883,000 and $883,000 for the years
ended December 31, 2004, 2003 and 2002, respectively and are included in General and
administrative expenses in the Consolidated Statements of Operations and Comprehensive Income
(Loss). Administrative Fee  Agency Securities This fee is equal to 0.25% per annum of the outstanding principal balance of all Agency
Securities held by the Company with an incentive equal to 20% of the amount by which the
total net interest income realized by the Company from its portfolio of Agency Securities
during each calendar month exceeds the average dollar amount of stockholders equity invested
in Agency Securities during the month times the composite dividend yield reported by the
National Association of Real Estate Investment Trusts for equity REITs which invest in
residential apartment properties. The Advisor has retained an unaffiliated sub-advisor to
advise it with respect to the Companys investments in Agency Securities. All fees paid to
the sub-advisor are the obligation of the Advisor. Property Acquisition Fee In connection with the identification, evaluation, and acquisition of real estate assets, the
Advisor receives a fee in the amount of 1.25% of the gross purchase price paid by the Company
for such real estate assets. The Partnership paid similar fees to the General Partner. During
the year ended December 31, 2004, this fee equaled approximately $371,000 and was included in
the fair value of the real estate asset acquired. As there were no acquisitions of real
estate during 2003 or 2002, no such fees were paid during those years. Mezzanine Investments Fee Effective with the amendment of the Agreement on June 3, 2004, in connection with the
underwriting and making of mezzanine investments, the Advisor receives a fee in the amount of
1.25% of the original principal amount of such mezzanine investments. As there was no
underwriting or making of mezzanine investments during the period ended December 31, 2004, no
such fees were paid. Reimbursement of Out-of-Pocket Expenses The Company reimburses the Advisor and its affiliate (prior to the merger, the General
Partner and its affiliate) for certain out-of-pocket costs and expenses that it incurs in
connection with the carrying out of the Companys business activities. The amount of such costs and expenses reimbursed to the Advisor and its affiliate or the
General Partner and its affiliate are shown below (in thousands): 56




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##### Table of Contents



AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued 2004
    
    
    2003
    
    
    2002Reimbursable salaries and benefits
    
    $
    1,145
    
    
    $
    544
    
    
    $
    628Professional fees and expenses
    
    
    542
    
    
    
    111
    
    
    
    100Costs capitalized
    
    
    74
    
    
    
    76
    
    
    
    17Insurance
    
    
    83
    
    
    
    74
    
    
    
    57Investor services and custodial fees
    
    
    42
    
    
    
    30
    
    
    
    25Report preparation and distribution
    
    
    29
    
    
    
    20
    
    
    
    21Registration fees
    
    
    27
    
    
    
    20
    
    
    
    45Restructuring costs
    
    
    615
    
    
    
    14
    
    
    
    598Consulting and travel expense
    
    
    28
    
    
    
    8
    
    
    
    10Telephone
    
    
    9
    
    
    
    5
    
    
    
    6Other expenses
    
    
    300
    
    
    
    161
    
    
    
    111$
    2,894
    
    
    $
    1,063
    
    
    $
    1,618
 Included in Accounts payable and accrued expenses in the consolidated balance sheets are
amounts due to the Advisor and its affiliate or the General Partner for administrative fees
and reimbursed costs and expenses of approximately $162,000 and $273,000 as of December 31,
2004 and 2003, respectively. Acquisition of certain property management assets On November 8, 2004, America First PM Group, Inc., (PM Group) a wholly-owned subsidiary of the
Company, acquired certain property management assets, rights to use certain proprietary systems,
certain property management agreements, certain employment agreements and other intangible assets
from America First Properties Management Companies, L.L.C. (America First Properties) and its
parent, America First Companies, L.L.C. (America First Companies). Prior to this transaction,
America First Properties managed
each of the multi-family apartment complexes owned and operated by the Company. The fees for
services provided were $1.3 million, $1.0 million and $1.0 million for the years ended December 31,
2004, 2003 and 2002, respectively and are included in Real estate operating expenses in the
Consolidated Statements of Income and Comprehensive Income. As a result of this transaction, the
management of all of the Companys properties and certain other properties owned by unaffiliated
parties were internalized and therefore no further management fees will be incurred. The purchase price for the acquired assets was $6.8 million, plus estimated transaction costs of
approximately $172,000. A Special Committee of the Board of Directors of the Company (Special
Committee), comprised solely of independent directors of the Company, negotiated the terms and
conditions of the transaction on behalf of the Company. The Special Committee retained an
independent investment banking firm to render an opinion to the Company as to the fairness to the
Company of the consideration paid for the acquired assets. Approximately $5.9 million of the
acquisition price was expensed as of the purchase date. The amount expensed was an allocation of
the acquisition price to the termination of a pre-existing relationship as outlined in EITF 04-01,
Accounting for Preexisting Relationships between the Parties to a Business Combination. 14. Stock Option Plan The Company adopted a Stock Option Plan (the Plan) on April 1, 2002 to permit awards of equity
based compensation to those providing services to the Company. The Plan is administered by the
Compensation Committee of the Board of Directors. The Plan allows for the granting of options to
purchase an aggregate of up to 750,000 shares of the Companys common stock. The Plan authorizes
the Board of Directors and its 57




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AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued Compensation Committee to grant Incentive Stock Options (ISOs), as
defined under section 422 of the IRS Code, non-qualified stock options (NQSOs), and dividend
equivalent rights (DERs) to eligible persons. The exercise price for options granted under the
Plan shall not be less than the fair market value of the Companys common stock on the date of the
grant. Options granted under the Plan expire 10 years from the respective grant dates of the
options. On February 4, 2003, NQSOs to acquire a total of 40,000 shares of common stock were granted to the
Companys four non-employee directors, at an exercise price of $8.73. The options vest 25% on the
grant date and 25% on each of the next three anniversaries of the grant date. On the same date, a
total of 40,000 DERs were granted to the Companys four non-employee directors, which vest 25% on
the grant date and 25% on each of the next three anniversaries of the grant date. DERs allow the
holder to receive dividend payments on vested options that are not yet exercised. Stock option activity for the period ended December 31, 2004 is summarized as follows (in
thousands): Number of
    
    
    Weighted AverageShares
    
    
    Exercise PriceBalance at December 31, 2002
    
    
    
    
    
    $
    Granted
    
    
    40,000
    
    
    
    8.73Cancelled
    
    
    
    
    
    
    Balance at December 31, 2003
    
    
    40,000
    
    
    $
    8.73Granted
    
    
    
    
    
    
    8.73Cancelled
    
    
    (5,000
    )
    
    
    8.73Exercised
    
    
    (5,000
    )
    
    
    8.73Balance at December 31, 2004
    
    
    30,000
    
    
    $
    8.73Options exercisable at December 31, 2004
    
    
    15,000
    
    
    $
    8.73
 As of December 31, 2004, all outstanding options have an exercise price of $8.73 and a
remaining contractual life of 8.05 years. The Company accounts for its stock options using the fair
value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Under SFAS
No. 123, the Company records compensation expense based upon the estimated fair value of its
granted options, over their vesting period. The compensation expense is included in General and
administrative expenses on the Consolidated Statements of Operations and Comprehensive Income
(Loss) with the related offset to Additional paid-in capital on the Consolidated Balance Sheets.
The per share estimated fair value of the options granted on their grant date was $2.19. The
estimated fair value of the Companys options was determined using the Black-Scholes option-pricing
model with the following assumptions: a risk free interest rate of 3.24%, an expected remaining
contractual life of 5.0 years and an expected volatility rate of 20%. Compensation expense for
stock options was approximately $21,000, $38,000 and $0 for the years ended December 31, 2004, 2003
and 2002, respectively. Payments on the DERs for options not exercised are charged to earnings when
declared and were $20,000, $10,000 and $0 for the years ended December 31, 2004, 2003 and 2002,
respectively. 15. Fair Value of Financial Instruments The following methods and assumptions were used by the Company in estimating the fair value of its
financial instruments: Cash and cash equivalents, restricted cash, investment in Agency Securities, investments in
corporate equity securities, accounts payable, dividend (distribution) payable and borrowings
under repurchase 58




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AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued agreements: Fair value approximates the carrying value of such assets and
liabilities due to their accounting policy and/or short-term nature. Bonds and mortgage notes payable and notes payable: Fair value is generally based on
estimated future cash flows discounted using the quoted market rate, from an independent
source, of similar obligations. Refer to the table below for the carrying amount and
estimated fair value of such instruments (in thousands): As of December 31, 2004
    
    
    As of December 31, 2003Carrying
    
    
    Estimated
    
    
    Carrying
    
    
    EstimatedAmount
    
    
    Fair Value
    
    
    Amount
    
    
    Fair ValueBonds and mortgage notes payable
    
    $
    167,150
    
    
    $
    178,089
    
    
    $
    82,215
    
    
    $
    89,354Notes payable
    
    $
    2,413
    
    
    $
    2,413
    
    
    $
    
    
    
    $
    
 16. Interest Rate Swap and Cap Agreements The Company may enter into interest rate swap and cap agreements to manage or hedge its interest
rate risk on its bonds and mortgage notes payable. In the absence of a specific and effective
hedging relationship, interest rate swaps and caps are accounted for as free standing financial
instruments which are marked to market each period through the statement of operations. The
interest rate swap and cap contracts owned by the Company as of December 31, 2004 and 2003 do not
qualify for hedge accounting and thus are accounted for as free standing financial instruments
which are marked to market each period through the statement of operations. The Company recorded a
$273,000 gain for the year ended December 31, 2004, an $11,000 loss for the year ended December 31,
2003 and a $6,000 gain for the year ended December 31, 2002, representing the change in the
estimated fair value of the interest rate swap and cap agreements. The fair value of interest rate
swap and cap agreements is included in Other assets on the Companys Consolidated Balance Sheets in
the amount of $99,000 and $12,000 as of December 31, 2004 and 2003, respectively. The fair value of
the interest rate swap and cap agreements were determined based upon current fair values as quoted
by recognized dealers. As of December 31, 2004, the Company had entered into seven interest rate swap agreements and two
interest rate cap agreements, with notional amounts and terms as follows (dollars in thousands): 59




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AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued Interest Rate Swaps and CapsCounterparty
    
    
    
    
    
    
    CompanyNotional
    
    
    Receive/
    
    
    Notional
    
    
    PayMaturity
    
    Amount
    
    
    Cap Rate
    
    
    Amount
    
    
    RateFixed to Variable
    
    December 6, 2006
    
    $
    4,800
    (5)
    
    
    7.00
    %
    
    $
    4,800
    (5)
    
    
    2.33
    % (3)Fixed to Variable
    
    December 6, 2006
    
    $
    5,300
    (5)
    
    
    7.125
    %
    
    $
    5,300
    (5)
    
    
    2.33
    % (3)Fixed to Variable
    
    December 6, 2006
    
    $
    5,179
    (1)(5)
    
    
    7.75
    %
    
    $
    5,179
    (1)(5)
    
    
    2.33
    % (3)Variable to Fixed
    
    February 3, 2009
    
    $
    8,100
    
    
    
    1.68
    % (2)
    
    $
    8,100
    
    
    
    2.82
    %Variable to Fixed
    
    June 25, 2009
    
    $
    10,910
    
    
    
    1.68
    % (2)
    
    $
    10,910
    
    
    
    3.30
    %Fixed to Variable
    
    July 13, 2009
    
    $
    6,930
    (5)
    
    
    7.25
    %
    
    $
    6,930
    (5)
    
    
    2.33
    % (3)Fixed to Variable
    
    July 13, 2009
    
    $
    3,980
    (5)
    
    
    7.50
    %
    
    $
    3,980
    (5)
    
    
    2.33
    % (3)Interest Rate Cap
    
    December 22, 2009
    
    $
    13,400
    
    
    
    4.50
    % (4)
    
    
    N/A
    
    
    
    N/AInterest Rate Cap
    
    December 22, 2009
    
    $
    12,750
    
    
    
    4.50
    % (4)
    
    
    N/A
    
    
    
    N/A
   (1)
 (2)Weighted average Bond Market Association rate for the three months ended December
31, 2004. (3)Weighted average Bond Market Association rate for the three months ended December
31, 2004 plus 0.65%. (4)Capped rate is tied to the weighted average Bond Market
Association rate for the month. (5)These are total return swaps 17. Net Income (Loss) Per Share (per BUC) Basic earnings per share (EPS) excludes dilution and is computed by dividing net income by the
weighted average number of common shares outstanding for the period. Diluted EPS reflects the
potential reduction in EPS that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock. EPS under the basic and diluted computation are as
follows (in thousands, except per share amounts): 60




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AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued Year Ended December 31,2004
    
    
    2003
    
    
    2002Income (loss) from continuing operations
    
    $
    (8,795
    )
    
    $
    4,361
    
    
    $
    990Income (loss) from discontinued operations
    
    
    6,030
    
    
    
    
    
    
    
    Net income (loss) available to common shareholders (basic)
    
    
    (2,765
    )
    
    
    4,361
    
    
    
    990Dividend equivalent rights
    
    
    
    
    
    
    10
    
    
    
    Net income (loss) available to common shareholders (diluted)
    
    $
    (2,765
    )
    
    $
    4,371
    
    
    $
    990Weighted
average common shares outstanding - basic
    
    
    8,243
    
    
    
    5,074
    
    
    
    5,023Weighted average common stock equivalents
    
    
    
    
    
    
    2
    
    
    
    Weighted
average common shares outstanding - diluted
    
    
    8,243
    
    
    
    5,076
    
    
    
    5,023Earnings per
share - basicIncome (loss) from continuing operations
    
    $
    (1.07
    )
    
    $
    0.86
    
    
    $
    0.19Income (loss) from discontinued operations
    
    
    0.73
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    (0.34
    )
    
    $
    0.86
    
    
    $
    0.19Earnings per
share - dilutedIncome (loss) from continuing operations
    
    $
    (1.07
    )
    
    $
    0.86
    
    
    $
    0.19Income (loss) from discontinued operations
    
    
    0.73
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    (0.34
    )
    
    $
    0.86
    
    
    $
    0.19
 For the year ended December 31, 2002, there were no differences between basic and diluted net
income per BUC as the Partnership did not have any stock options or other types of convertible
securities. The computation of diluted EPS for the year ended December 31, 2004 excluded 30,000
outstanding stock options because the effect of these securities would have been anti-dilutive as
the Company incurred a net loss for the year. 18. Employee Benefit Plans With the acquisition of certain employment agreements from America First Properties, the Company
acquired the associated defined contribution plan on November 8, 2004. The America First PM Group,
Inc. 401(k) Plan (the plan) is a defined contribution plan that satisfies the requirements of
Section 401(a) of the Internal Revenue Code. Eligible employees may contribute 1% to 15% of their
annual compensation to the Plan, limited to maximum annual amount as set by the Internal Revenue
Service. The Company matches contributions to the Plan of $0.25 for each $1.00 contributed up to
15% of the participants compensation. All matching contributions vest immediately. In addition,
each year the Company may make additional discretionary, qualified non-elective employer
contributions to the Plan. Such contributions to the Plan are allocated among eligible participants
in the proportion of their salaries to the total salaries of all participants. The Companys
matching contribution to this plan was $10,000, $0, and $0 for the years ended December 31, 2004,
2003, and 2002 respectively. There were no discretionary, qualified non-elective contributions for
the years ended December 31, 2004, 2003, and 2002. The plan is funded on a current basis. Effective January 1, 2005, the Plan was amended and restated essentially under the same terms. 19. Discontinued Operations On June 25, 2004, the Company entered into a purchase and sale agreement to sell the property
commonly referred to as The Glades Apartments. The Glades Apartments was sold for a total sales
price of $20.0 million which consisted of cash and debt assumed by the buyer. The net cash
proceeds to the Company were 61




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AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued approximately $11.1 million, net of closing costs of approximately $149,000. The total debt
assumed by the buyer was approximately $8.8 million. A gain on the sale of this property was
realized upon the closing of the transaction on December 15, 2004 in the amount of $6.0 million. This property was acquired as a result of the AFREZ merger therefore the results of operations are
reflected from the merger date of June 3, 2004 to December 31, 2004 (in thousands): Rental income
    
    $
    1,480Real estate operating expenses
    
    
    758Depreciation expense
    
    
    231Income from discontinued rental operations
    
    
    491Interest expense
    
    
    103Amortization expense  in-place lease intangibles
    
    
    331Other expenses
    
    
    434Income from discontinued operations before gain on sale
    
    
    57Gain on sale
    
    
    5,973Income from discontinued operations
    
    $
    6,030
 20. Recent Accounting Pronouncements In December 2004, the FASB issued SFAS No. 152, Accounting for Real Estate Time-Sharing
Transactions an amendment of FASB Statements No. 66 and 67. This Statement amends SFAS No. 66,
Accounting for Sales of Real Estate to reference the financial accounting and reporting guidance
for real estate time-sharing transactions that is provided in AICPA Statement of Position (SOP)
04-2, Accounting for Real Estate Time-Sharing Transactions. This Statement also amends SFAS No.
67, Accounting for Costs and Initial Rental Operations of Real Estate Projects to specify that
guidance relating to (a) incidental operations (b) costs incurred to sell real estate projects does
not apply to real estate time-sharing transactions. This Statement is effective for fiscal years
beginning after June 15, 2005. The Company does not believe SFAS No. 152 will have a material
impact on the consolidated financial statements. In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary Assets an amendment of
APB No. 29. This Statement amends APB Opinion No. 29, Accounting for Non-monetary Transactions
to eliminate the exception for non-monetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of non-monetary assets that do not have commercial
substance. This Statement requires that an entity record a non-monetary exchange at fair value and
recognize any gain or loss if the transaction has commercial substance. This Statement is effective
for fiscal years beginning after June 15, 2005. The Company does not believe the adoption of SFAS
No. 153 will have a material impact on the consolidated financial statements. In December 2004, the FASB issued SFAS No. 123 (Revised 2004), Share-Based Payment.This
Statement is a revision of SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes
APB No. 25, Accounting for Stock Issued to Employees.The Statement requires companies to
recognize the expense associated with the grant-date fair value of stock options and other equity
based compensation issued to employees. The Company currently recognizes expense on equity based
compensation in accordance with SFAS No. 123, as revised. 62




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`

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued 21. Summary of Quarterly Results of Operations (Unaudited) First
    
    
    Second
    
    
    Third
    
    
    FourthYear Ended December 31, 2004
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterTotal income
    
    $
    6,128
    
    
    $
    8,157
    
    
    $
    11,799
    
    
    $
    10,217Total expenses
    
    
    (6,109
    )
    
    
    (8,358
    )
    
    
    (13,147
    )
    
    
    (17,482
    )Income (loss) from continuing
operations
    
    
    19
    
    
    
    (201
    )
    
    
    (1,348
    )
    
    
    (7,265
    )Income from discontinued
operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,030Net income (loss)
    
    $
    19
    
    
    $
    (201
    )
    
    $
    (1,348
    )
    
    $
    (1,235
    )Income (loss) from continuing
operations,
basic and diluted, per share
    
    
    
    
    
    
    (0.03
    )
    
    
    (0.13
    )
    
    
    (0.69
    )Income from discontinued
operations,
basic and diluted, per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.57Net income, basic and diluted,
per share
    
    $
    
    
    
    $
    (0.03
    )
    
    $
    (0.13
    )
    
    $
    (0.12
    )
 First
    
    
    Second
    
    
    Third
    
    
    FourthYear Ended December 31, 2003
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterTotal income
    
    $
    6,156
    
    
    $
    10,592
    
    
    $
    6,052
    
    
    $
    6,098Total expenses
    
    
    (5,986
    )
    
    
    (6,070
    )
    
    
    (6,265
    )
    
    
    (6,216
    )Net income (loss)
    
    $
    170
    
    
    $
    4,522
    
    
    $
    (213
    )
    
    $
    (118
    )Net income,
basic and diluted, per share
    
    $
    0.03
    
    
    $
    0.89
    
    
    $
    0.04
    
    
    $
    0.02
 22. Segment Reporting The Companys reportable segments consist of: (i) its multifamily apartment properties; (ii) its
commercial property; and (iii) its investment in Agency Securities. The Company defines each of its multifamily apartment properties as an individual operating
segment. It has determined that all multifamily apartment properties have similar economic
characteristics and meet the other criteria which permit the multifamily apartment properties to be
aggregated into one reportable segment, that being the acquiring, holding, operating and selling of
multifamily apartment properties. The Companys chief operating decision-makers assess and measure
segment operating results based on a performance measure referred to as net operating income at the
property level. Net operating income for each multifamily apartment property represents its net
rental revenues less its real estate operating expenses. The Companys commercial property is defined as a separate individual operating segment. The
Companys chief operating decision-makers assess and measure segment operating results based on a
performance measure referred to as net operating income at the commercial property level. Net
operating income for the commercial property represents its net lease revenues less its real estate
operating expenses. The Company assesses the performance of its investment in Agency Securities by calculating its net
interest income earned on these securities. Net interest income is calculated as Agency Securities
interest income, less premium amortization, less interest expense incurred on the financing used to
acquire these securities. All of the 63




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AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  continued Companys Agency Securities are combined into one reportable segment for this purpose (the Company
did not have this segment for year 2002). The accounting policies of each of the Companys segments are described in Note 2. The revenues, net operating income, net income and total assets for the Companys reportable
segments as of and for the years ended December 31, 2004, 2003 and 2002 are summarized as follows
(in thousands): 2004
    
    
    2003
    
    
    2002Multifamily real estate segment revenues
    
    $
    34,476
    
    
    $
    23,453
    
    
    $
    24,206Rental income from commercial property
    
    
    843
    
    
    
    670
    
    
    
    656Consolidated rental income
    
    $
    35,319
    
    
    $
    24,123
    
    
    $
    24,862Net operating income from multifamily
real estate segment
    
    $
    14,891
    
    
    $
    10,093
    
    
    $
    11,019Reconciling items:Depreciation expense
    
    
    (6,733
    )
    
    
    (4,767
    )
    
    
    (4,731
    )Other expenses
    
    
    (8,012
    )
    
    
    (4,282
    )
    
    
    (4,298
    )Net income from multifamily real estate segment
    
    $
    146
    
    
    $
    1,044
    
    
    $
    1,990Reconciling items:Net operating income from commercial property
    
    
    644
    
    
    
    485
    
    
    
    450Agency backed securities net interest income
    
    
    770
    
    
    
    42
    
    
    
    Other income
    
    
    212
    
    
    
    4,700
    
    
    
    323Other expenses
    
    
    (10,421
    )
    
    
    (1,910
    )
    
    
    (1,773
    )Net income (loss)
    
    $
    (8,795
    )
    
    $
    4,361
    
    
    $
    990Multifamily real estate segment assets
    
    $
    232,709
    
    
    $
    119,229
    
    
    $
    124,687Reconciling items:Commercial property real estate assets
    
    
    2,881
    
    
    
    2,517
    
    
    
    2,850Investment in mortgage-backed securities
    
    
    26,192
    
    
    
    36,027
    
    
    
    Other assets
    
    
    35,615
    
    
    
    9,119
    
    
    
    9,318Consolidated assets
    
    $
    297,397
    
    
    $
    166,892
    
    
    $
    136,855
 The Company does not derive any of its consolidated revenues from foreign countries and does not
have any major customers that individually account for 10% or more of the Companys consolidated
revenues. 64




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##### Table of Contents



Schedule III AMERICA FIRST APARTMENT INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2004 Costs CapitalizedInitial Cost
    
    
    SubsequentDescription
    
    
    
    
    
    
    to Company
    
    
    to AcquisitionBuilding
    
    
    BuildingNumber
    
    
    
    
    
    
    
    
    
    
    and
    
    
    andProperty Name
    
    Location
    
    
    of Units
    
    
    Encumbrances
    
    
    Land
    
    
    Improvements
    
    
    ImprovementsArbor Hills
    
    Antioch, TN
    
    
    548
    
    
    
    (a
    )
    
    $
    4,400,000
    
    
    $
    25,336,326
    
    
    $
    Belvedere Apartments
    
    Naples, FL
    
    
    162
    
    
    
    (a
    )
    
    
    956,326
    
    
    
    8,271,406
    
    
    
    66,722Bluff Ridge Apartments
    
    Jacksonville, NC
    
    
    108
    
    
    
    
    
    
    
    203,050
    
    
    
    3,501,391
    
    
    
    Brentwood Oaks Apartments
    
    Nashville, TN
    
    
    262
    
    
    
    (a
    )
    
    
    2,000,000
    
    
    
    9,836,737
    

    
    
    Coral Point Apartments
    
    Mesa, AZ
    
    
    336
    
    
    
    (a
    )
    
    
    2,240,000
    
    
    
    8,960,000
    
    
    
    243,829Covey at Fox Valley
    
    Aurora, IL
    
    
    216
    
    
    
    (a
    )
    
    
    1,320,000
    
    
    
    10,028,337
    
    
    
    470,767Delta Crossing
    
    Charlotte, NC
    
    
    178
    
    
    
    
    
    
    
    800,000
    
    
    
    5,031,386
    
    
    
    Elliots Crossing Apartments
    
    Tempe, AZ
    
    
    247
    
    
    
    (a
    )
    
    
    1,301,063
    
    
    
    9,694,087
    
    
    
    9,396The Exchange at Palm Bay
    
    Palm Bay, FL
    
    
    72,002
    
    
    
    (a
    )
    
    
    1,296,003
    
    
    
    2,483,231
    
    
    
    2,350,466Fox Hollow Apartments
    
    High Point, NC
    
    
    184
    
    
    
    (a

    )
    
    
    1,000,000
    
    
    
    5,045,492
    
    
    
    102,525Greenbriar Apartments
    
    Tulsa, OK
    
    
    120
    
    
    
    (a
    )
    
    
    648,000
    
    
    
    3,673,383
    
    
    
    120,522Highland Park Apartments
    
    Columbus, OH
    
    
    252
    
    
    
    (a
    )
    
    
    1,562,250
    
    
    
    6,206,883
    
    
    
    111,864The Hunt Apartments
    
    Oklahoma City, OK
    
    
    216
    
    
    
    (a
    )
    
    
    550,000
    
    
    
    7,069,306
    
    
    
    (8,610
    )Huntsview Apartments
    
    Greensboro, NC
    
    
    240
    
    
    
    (a
    )
    
    
    1,844,500
    
    
    
    6,575,966
    
    
    
    13,645Jackson Park Place Apartments
    
    Fresno, CA
    
    
    296
    
    
    
    (a
    )
    
    
    1,400,000
    
    
    
    10,709,534
    
    
    
    191,084Lakes of Northdale Apartments
    
    Tampa, FL
    
    
    216
    
    
    
    (a
    )
    
    
    1,552,517
    
    
    
    8,390,048
    
    
    
    63,744Littlestone of Village Green
    
    Gallatin, TN
    
    
    200
    
    
    
    (a
    )
    
    
    621,340
    
    
    
    9,942,189
    
    
    
    39,057Misty Springs Apartments
    
    Daytona Beach, FL
    
    
    128
    
    
    
    (a
    )
    
    
    741,587
    
    
    
    3,826,576
    
    
    
    3,987Monticello Apartments
    
    Southfield, MI
    
    
    106
    
    
    
    (a
    )
    
    
    565,384
    
    
    
    5,274,104
    
    
    
    8,450Oakhurst Apartments
    
    Ocala, FL
    
    
    214
    
    
    
    (a
    )
    
    
    846,621
    
    
    
    8,380,705
    
    
    
    38,665Oakwell Farms Apartments
    
    Nashville, TN
    
    
    414
    
    
    
    (a
    )
    
    
    1,946,000
    
    
    
    15,758,907
    
    
    
    423,766Park at Countryside
    
    Port Orange, FL
    
    
    120
    
    
    
    (a
    )
    
    
    647,000
    
    
    
    2,616,648
    
    
    
    (9,635
    )The Park at 58 Apartments
    
    Chattanooga, TN
    
    
    196
    
    
    
    (a
    )
    
    
    231,113
    
    
    
    4,122,226
    
    
    
    148,312Park Trace Apartments
    
    Norcross, GA
    
    
    260
    
    
    
    (a
    )
    
    
    2,246,000
    
    
    
    11,789,810
    
    
    
    98,614The Ponds at Georgetown
    
    Ann Arbor, MI
    
    
    134
    
    
    
    (a
    )
    
    
    652,700
    
    
    
    6,821,775
    
    
    
    24,201The Retreat
    
    Atlanta, GA
    
    
    226
    
    
    
    (a
    )
    
    
    1,800,000
    
    
    
    7,315,697
    
    
    
    85,244St. Andrews at Westwood
Apartments
    
    Orlando, FL
    
    
    259
    
    
    
    (a
    )
    
    
    1,617,200
    
    
    
    14,262,540
    
    
    
    (23,216
    )Shelby Heights
    
    Bristol, TN
    
    
    100
    
    
    
    (a
    )
    
    
    175,000
    
    
    
    2,952,846
    
    
    
    Watermans Crossing
    
    Newport News, VA
    
    
    260
    
    
    
    (a
    )
    
    
    1,620,482
    
    
    
    12,717,195
    
    
    
    8,684Waters Edge Apartments
    
    Lake Villa, IL
    
    
    108
    
    
    
    (a
    )
    
    
    486,000
    
    
    
    4,601,022
    
    
    
    19,630$
    37,270,136
    
    
    $
    241,195,753
    
    
    $
    4,601,713
    65




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##### Table of Contents



Buildingand
    
    
    
    
    
    
    Accumulated
    
    
    Date of
    
    
    Date
    
    
    DepreciationProperty Name
    
    Land
    
    
    Improvements
    
    
    Total(d) , (e)
    
    
    Depreciation(f)
    
    
    Construction
    
    
    Acquired
    
    
    LifeArbor Hills
    
    $
    4,400,000
    
    
    $
    25,336,326
    
    
    $
    29,736,326
    
    
    $
    
    
    
    
    1988
    
    
    
    2004
    
    
        
27.5 yearsBelvedere Apartments
    
    
    956,326
    
    
    
    8,338,128
    
    
    
    9,294,454
    
    
    
    1,249,280
    
    
    
    1985
    
    
    
    2000
    
    
        
27.5 yearsBluff Ridge Apartments
    
    
    203,050
    
    
    
    3,501,391
    
    
    
    3,704,441
    
    
    
    74,272
    
    
    
    1988
    
    
    
    2004
    
    
    
    40 yearsBrentwood Oaks
Apartments
    
    
    2,000,000
    
    
    
    9,836,737
    
    
    
    11,836,737
    
    
    
    208,651
    
    
    
    1986
    
    
    
    2004
    
    
        
27.5 yearsCoral Point Apartments
    
    
    2,240,000
    
    
    
    9,203,829
    
    
    
    11,443,829
    
    
    
    4,422,429
    
    
    
    1987
    
    
    
    1991
    
    
        
27.5 yearsCovey at Fox Valley
    
    
    1,320,000
    
    
    
    10,499,104
    
    
    
    11,819,104
    
    
    
    6,178,674
    
    
    
    1989
    
    
    
    1989
    
    
        
27.5 yearsDelta Crossing
    
    
    800,000
    
    
    
    5,031,386
    
    
    
    5,831,386
    
    
    
    106,726
    
    
    
    1989
    
    
    
    2004
    
    
        
27.5 yearsElliots Crossing
Apartments
    
    
    1,301,063
    
    
    
    9,703,483
    
    
    
    11,004,546
    
    
    
    205,492
    
    
    
    1987
    
    
    
    2004
    
    
        
27.5 yearsThe Exchange at Palm
Bay
    
    
    1,296,003
    
    
    
    4,833,697
    
    
    
    6,129,700
    
    
    
    3,666,017
    
    
    
    1988
    
    
    
    1990
    
    
        
31.5 yearsFox Hollow Apartments
    
    
    1,000,000
    
    
    
    5,148,017
    
    
    
    6,148,017
    
    
    
    112,722
    
    
    
    1989
    
    
    
    2004
    
    
        
40 yearsGreenbriar Apartments
    
    
    648,000
    
    
    
    3,793,905
    
    
    
    4,441,905
    
    
    
    832,289
    
    
    
    1985
    
    
    
    1998
    
    
        
27.5 yearsHighland Park
Apartments
    
    
    1,562,250
    
    
    
    6,318,747
    
    
    
    7,880,997
    
    
    
    137,639

    
    
    
    1987
    
    
    
    2004
    
    
        
40 yearsThe Hunt Apartments
    
    
    550,000
    
    
    
    7,060,696
    
    
    
    7,610,696
    
    
    
    1,559,762
    
    
    
    1984
    
    
    
    1998
    
    
        
27.5 yearsHuntsview Apartments
    
    
    1,844,500
    
    
    
    6,589,611
    
    
    
    8,434,111
    
    
    
    139,573
    
    
    
    1987
    
    
    
    2004
    
    
        
27.5 yearsJackson Park Place
Apartments
    
    
    1,400,000
    
    
    
    10,900,618
    
    
    
    12,300,618
    
    
    
    3,107,946
    
    
    
    1985
    
    
    
    1997
    
    
        
27.5 yearsLakes of Northdale
Apartments
    
    
    1,552,517
    
    
    
    8,453,792
    
    
    
    10,006,309
    
    
    
    177,971
    
    
    
    1985
    
    
    
    2004
    
    
        
27.5 yearsLittlestone of
Village Green
    
    
    621,340
    
    
    
    9,981,246
    
    
    
    10,602,586
    
    
    
    2,448,805
    
    
    
    1987
    
    
    
    1998
    
    
        
27.5 yearsMisty Springs
Apartments
    
    
    741,587
    
    
    
    3,830,563
    
    
    
    4,572,150
    
    
    
    82,063
    
    
    
    1989
    
    
    
    2004
    
    
        
40 yearsMonticello Apartments
    
    
    565,384
    
    
    
    5,282,554
    
    
    
    5,847,938
    
    
    
    111,875
    
    
    
    1988
    
    
    
    2004
    
    
        
40 yearsOakhurst Apartments
    
    
    846,621
    
    
    
    8,419,370
    
    
    
    9,265,991
    
    
    
    1,255,693
    
    
    
    1985
    
    
    
    2000
    
    
        
27.5 yearsOakwell Farms
Apartments
    
    
    1,946,000
    
    
    
    16,182,673
    
    
    
    18,128,673
    
    
    
    3,341,302
    
    
    
    1986
    
    
    
    1999
    
    
        
27.5 yearsPark at Countryside
    
    
    647,000
    
    
    
    2,607,013
    
    
    
    3,254,013
    
    
    
    761,767
    
    
    
    1983
    
    
    
    1996
    
    
        
27.5 yearsThe Park at 58
Apartments
    
    
    231,113
    
    
    
    4,270,538
    
    
    
    4,501,651
    
    
    
    1,921,326
    
    
    
    1987
    
    
    
    1991
    
    
        
27.5 yearsPark Trace Apartments
    
    
    2,246,000
    
    
    
    11,888,424
    
    
    
    14,134,424
    
    
    
    3,092,594
    
    
    
    1988
    
    
    
    1997
    
    
        
27.5 yearsThe Ponds at
Georgetown
    
    
    652,700
    
    
    
    6,845,976
    
    
    
    7,498,676
    
    
    
    145,229
    
    
    
    1988
    
    
    
    2004
    
    
        
40 yearsThe Retreat
    
    
    1,800,000
    
    
    
    7,400,941
    
    
    
    9,200,941
    
    
    
    2,074,996
    
    
    
    1985
    
    
    
    1997
    
    
        
27.5 yearsSt. Andrews at
Westwood
    
    
    Apartments
    
    
    1,617,200
    
    
    
    14,239,324
    
    
    
    15,856,524
    
    
    
    3,260,080
    
    
    
    1989
    
    
    
    1998
    
    
        
27.5 yearsShelby Heights
    
    
    175,000
    
    
    
    2,952,846
    
    
    
    3,127,846
    
    
    
    1,493,313
    
    
    
    1987
    
    
    
    1991
    
    
        
27.5 yearsWatermans Crossing
    
    
    1,620,482
    
    
    
    12,725,879
    
    
    
    14,346,361
    
    
    

    289,458
    
    
    
    1989
    
    
    
    2004
    
    
        
40 yearsWaters Edge Apartments
    
    
    486,000
    
    
    
    4,620,652
    
    
    
    5,106,652
    
    
    
    108,768
    
    
    
    1988
    
    
    
    2004
    
    
        
40 years$
    37,270,136
    
    
    $
    245,797,466
    
    
    $
    283,067,602
    
    
    $
    42,566,712
    2004
    
    
    2003
    
    
    2002Balance  beginning of year
    
    $
    150,591,081
    
    
    $
    150,182,234
    
    
    $
    149,519,602Acquisition of real estate
    
    
    145,592,184
    
    
    
    
    
    
    
    Disposition of real estate
    
    
    (14,287,472
    )
    
    
    
    
    
    
    Improvements
    
    
    1,171,811
    
    
    
    408,847
    
    
    
    662,632Balance  end of year
    
    $
    283,067,604
    
    
    $
    150,591,081
    
    
    $
    150,182,234
 (e) As of December 31, 2004, the aggregate cost of the Companys investment in real estate for
Federal income tax purposes amounted to $278,650,492. 66




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(f) Reconciliation of Accumulated Depreciation: 2004
    
    
    2003
    
    
    2002Balance  beginning of year
    
    $
    35,692,845
    
    
    $
    30,691,556
    
    
    $
    25,727,505Depreciation on disposed
properties
    
    
    (231,018
    )
    
    
    
    
    
    
    Depreciation
    
    
    7,104,885
    
    
    
    5,001,289
    
    
    
    4,964,051Balance  end of year
    
    $
    42,566,712
    
    
    $
    35,692,845
    
    
    $
    30,691,556
 67




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. AMERICA FIRST APARTMENT INVESTORS, INC.Date:  March 21, 2005
    /s/ John H. CassidyJohn H. CassidyPresident and Chief Executive Officer 68




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##### Table of Contents



Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Company and in the capacities and on the
dates indicated. Date: March 21, 2005
    
    By /s/ Michael B. Yanney*Michael B. Yanney,Chairman of the Board and DirectorDate: March 21, 2005
    
    By /s/ John H. CassidyJohn H. Cassidy,President and Chief Executive OfficerDate: March 21, 2005
    
    By /s/ Michael J. DraperMichael J. Draper,Chief Financial OfficerDate: March 21, 2005
    
    By /s/ George J. Behringer*George J. Behringer,DirectorDate: March 21, 2005
    
    By /s/ George V. Janzen*George V. Janzen,DirectorDate: March 21, 2005
    
    By /s/ George H. Krauss*George H. Krauss,DirectorDate: March 21, 2005
    
    By /s/ Gregor Medinger*Gregor Medinger,DirectorDate: March 21, 2005
    
    By /s/ Lisa Y. Roskens*Lisa Y. Roskens,DirectorDate: March 21, 2005
    
    By /s/ Steven W. Seline*Steven W. Seline,Director
 *By Michael J. Draper, Attorney in Fact /s/ Michael J. Draper
     Michael J. Draper 69