1265131--3/22/2006--AFFORDABLE_RESIDENTIAL_COMMUNITIES

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Risks Related to Our Properties and Operations Adverse economic or other conditions in the markets in which we do business, including our five largest markets of Dallas/Fort Worth, Texas; Atlanta, Georgia; Salt Lake City, Utah; the Front Range of Colorado; and Kansas City-Lawrence-Topeka, Kansas/Missouri, could negatively affect our occupancy and results of operations. We may not be able to maintain and improve our occupancy through expansion of our home rental program and our home lease with option to purchase program, which could negatively affect our revenue and our results of operations. We may not be able to maintain and improve our occupancy through our in-community home sales and financing program, which could adversely affect our revenues and our results of operations. The terms of our acquisition agreement with Hometown may cause us to incur additional costs and liabilities. The manufactured housing industry continues to face a challenging operating environment marked by a shortage of available financing for home purchases and a significant decrease in manufactured home shipments, which has put downward pressure on occupancy in manufactured home communities and may continue to do so. We have reported historical accounting losses on a consolidated basis since our inception, and we may continue to report accounting losses in the future. We may not be successful in identifying suitable acquisitions that meet our criteria or in completing such acquisitions and successfully integrating and operating acquired properties, which may impede our growth and negatively affect our results of operations. The availability of competing housing alternatives in our markets could negatively affect occupancy levels and rents in our communities, which could adversely affect our revenue and our results of operations. Uninsured losses or losses in excess of our insurance coverage could adversely affect our financial condition and our cash flow. Exposure to mold and contamination related claims that are problematic to insure against could adversely affect our results of operations. Environmental compliance costs and liabilities associated with operating our communities may affect our results of operations. Increases in taxes may reduce our income. Rent control or rent stabilization legislation and other regulatory restrictions may limit our ability to increase rents or dispose of our properties. Costs associated with complying with the Americans with Disabilities Act of 1990 may result in unanticipated expenses. We may incur significant costs complying with other regulations applicable to our business. Expansion of our existing communities entails certain risks which may negatively affect our operating results. Risks Related to Our Debt Financings We are subject to the risks normally associated with debt financing, including the risk that payments of principal and interest on borrowings may leave us with insufficient cash to operate our communities or pay distributions. We could become more highly leveraged because our organizational documents contain no limitation on the amount of debt we may incur. Increases in interest rates may increase our interest expense, which would adversely affect our cash flow, our ability to service our indebtedness and our ability to make distributions to our stockholders. Failure to hedge effectively against interest rate changes may adversely affect our results of operations. Our growth depends on external sources of capital which are outside of our control. Risks Related to Organizational and Corporate Structure Our business could be harmed if key personnel terminate their employment with us. We may change our investment and financing strategies and enter into new lines of business without stockholder consent, which may result in riskier investments than our current investments. Our decision not to operate as a REIT could result in higher tax expenses. Conflicts of interest could arise as a result of our relationship with our operating partnership. We may suffer adverse consequences if we expand or enter into new non-real estate business ventures. Our rights and the rights of our stockholders to take action against our directors and officers are limited. Risks Related to Ownership of the Senior Exchangeable Notes (the Notes ) The Notes are effectively subordinated to the Company s existing and future secured indebtedness. The Notes are effectively subordinated to liabilities of the Company s subsidiaries. There are no restrictive covenants in the indenture relating to the Company s ability to incur future indebtedness or complete other financing transactions. An adverse rating of the Notes may cause their trading price to fall. The failure of our results to meet the estimates of market analysis could adversely affect the trading price of the Notes and our common stock. Risks Related to the Securities Markets and Ownership of Our Common Stock Additional issuances of equity securities and exchange of the Notes for our common stock will dilute the ownership interest of our existing stockholders, including former Note holders who had previously exchanged their Notes for common stock. Our recent cash distributions to our common and preferred stockholders have exceeded our operating cash flows. Our common stock price may experience substantial volatility, which may affect your ability, following any exchange, to sell our common stock at an advantageous price and could impact the market price, if any, of the Notes.

Full 10-K form ▸

1265131--3/22/2006--AFFORDABLE_RESIDENTIAL_COMMUNITIES_INC