(1)    Same communities information excludes results of communities acquired in the Hometown, D.A.M. and other acquisitions after January 1, 2003 and the communities sold or held for sale before December 31, 2004.

(2)    Excludes segment results as a result of the restructuring in September 2003 in which we closed all stand-alone retail stores existing on January 1, 2003 at which time we had no significant in-community sales operations.

(3)    Excludes $10.1 million of compensation expense related to stock issued in connection with ARC’s IPO.

(4)    Excludes property management expenses incurred in connection with the Hometown acquisition.

(5)    Excludes interest earned on additional cash received in connection with ARC’s IPO, the financing transaction and the Hometown acquisition.

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Comparison of Year Ended December 31, 2003 to Year Ended December 31, 2002

Overview.   Our results for the year ended December 31, 2003, as compared to the year ended December 31, 2002 include the operations of the 107 communities comprising 20,511 homesites and the retail home sales, insurance, consumer finance and other businesses we acquired in the reorganization for the entire year ended December 31, 2003 and for approximately eight months for the year ended December 31, 2002. In addition to the effects of the reorganization, our results for the year ended December 31, 2003 also reflect the effects on our operations of the 22 community acquisitions we completed between January 1, 2002 and December 31, 2003 and exclude the 30 communities that we discontinued in the third and fourth quarters of 2004.

Revenue.   Revenue for the year ended December 31, 2003 was $163.2 million, as compared to $136.5 million for the year ended December 31, 2002, an increase of $26.7, or 20%. This increase was due to an increase of $33.3 million in rental income and a decrease of $6.6 million in other revenue consisting of sales of manufactured homes and utility and other income.

Rental income increased by $33.3 million, consisting of $20.8 from the communities acquired in the reorganization, $8.0 million from other community acquisitions and $4.5 million from same communities. The increase in same communities revenues consists of $4.2 million from increased rental rates, $3.1 million from home renter rental income partially offset by $2.8 million from lower occupancy.

The decrease in other income of $6.6 million is due to a $10.3 million decrease in sales of manufactured homes partially offset by a $3.7 million increase in utility and other income.

Property Operations Expense.   For the year ended December 31, 2003, total property operations expense was $44.3 million, as compared to $33.3 million for the year ended December 31, 2002, an increase of $11.0 million, or 33%. The increase was due to increases in expenses of $7.8 million from communities we acquired in the reorganization, $3.1 million from other community acquisitions and $1.0 million from same communities. The increase on a same community basis was due primarily to higher salaries and benefits of $513,000, due to increased staffing and, to a lesser extent, increases in wages and employee benefits and higher bad debt expense of $478,000, as a result of increased tenant defaults caused by general economic conditions and reserves for rent owed by certain finance companies which own repossessed homes in our communities.

Real Estate Taxes Expense.   Real estate taxes expense for the year ended December 31, 2003 was $10.2 million, as compared to $6.6 million for the year ended December 31, 2002, an increase of $3.6 million, or 55%. The increase was due primarily to communities we acquired in the reorganization, other community acquisitions and an increase in the number of rental homes we own.

Cost of Manufactured Homes Sold.   The cost of manufactured homes sold was $18.4 million for the year ended December 31, 2003, as compared to $25.8 million for the year ended December 31, 2002, a decrease of $7.4 million, or 29%. The decrease was due primarily to a 121 unit decrease in sales of manufactured homes from 629 units sold for the year ended December 31, 2002 to 508 units sold for the year ended December 31, 2003, partially offset by the inclusion of the results of the retail home sales business we acquired in the reorganization for the entire year in 2003. The gross margin for manufactured homes sold was 15% for the year ended December 31, 2003 and 19% for the year ended December 31, 2002.

Retail Home Sales, Finance, Insurance and Other Operations Expense.   For the year ended December 31, 2003, total retail home sales, finance, insurance and other operations expense was $7.4 million, as compared to $8.6 million for the year ended December 31, 2002, a decrease of $1.2 million, or 14%. This decrease is due to lower sales of manufactured homes and a lower cost structure as a result of eliminating the costs of maintaining stand-alone retail stores, partially offset by increases in expenses

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resulting from the inclusion of results of the retail home sales business we acquired in the reorganization for the entire period in 2003 as compared to eight months for 2002.

Property Management Expense.   Property management expense for the year ended December 31, 2003 was $5.5 million, as compared to $4.1 million for the year ended December 31, 2002, an increase of $1.4 million, or 34%. The increase was due primarily to inclusion of the results of the communities we acquired in the reorganization for an entire year in 2003.

General and Administrative Expense.   General and administrative expense for the year ended December 31, 2003 was $16.9 million, as compared to $13.1 million for the year ended December 31, 2002, an increase of $3.8 million, or 29%. The increase was due primarily to the reorganization, a $900,000 one time charge for vacating unused office space, a non-recurring credit of $291,000 against our insurance expenses in 2002, and, in 2003, to higher professional services expenses related primarily to our manufactured home acquisitions. As a percentage of total revenue, general and administrative expense was 10% for the year ended December 31, 2003, as compared to 9.6% for the year ended December 31, 2002.

Depreciation and Amortization Expense.   Depreciation and amortization expense for the year ended December 31, 2003 was $46.5 million, as compared to $37.1 million for the year ended December 31, 2002, an increase of $9.4 million, or 25%. The increase relates to the reorganization, other community acquisitions, related capital improvements and rental home acquisitions. This was partially offset by the increase in depreciable lives of community improvements from 20 years to 30 years made in connection with the reorganization.

Retail Home Sales and Insurance Asset and Goodwill Impairment and Other Expense.   At the time of the reorganization, our retail home sales subsidiary was engaged in the retail sale of manufactured homes to third parties through 19 separate, stand-alone retail dealership locations in five states. Due to significant changes in the industry, particularly the shortage of consumer financing to support sales of manufactured homes, beginning in late 2002 we redirected our retail home sales efforts away from a retail dealership presence and into an in-community presence focused exclusively on sales of homes in our communities. Our in-community retail home sales business operates in conjunction with our consumer finance business through which we provide credit to qualified buyers of homes in our communities.

During the year ended December 31, 2003, we substantially completed the redirection of our retail home sales efforts by selling 11 of our retail dealerships, ceasing operations in the remaining five retail dealerships and beginning in-community retail home sales activities in nearby communities owned by us. With respect to five retail dealerships we closed, we relocated the inventory to nearby manufactured home communities we own.

In connection with these activities, we recorded a charge of $1.4 million, net of sales proceeds of $1.3 million, to write off fixed assets and to record the cost of remaining lease obligations at the retail dealerships we closed in 2003.

At December 31, 2002, we recorded an impairment of goodwill in the retail home sales, finance and insurance operations of $13.6 million. The impairment for the retail home sales and finance operations arose from a deterioration of its operating performance subsequent to the reorganization due to lower projected sales volumes caused by adverse market conditions of the manufactured home sales industry as a whole, the related finance industry, and the market for manufactured home sales businesses. The impairment for the insurance operation arose because the insurance operation derives the majority of its revenue from the retail home sales and finance operations. We had no impairment of goodwill for the year ended December 31, 2003.

Interest Expense.   Interest expense for the year ended December 31, 2003 was $57.4 million, as compared to $43.8 million for the year ended December 31, 2002, an increase of $13.6 million, or 31%. The increase was due primarily to: additional indebtedness acquired in the reorganization of

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$380.8 million, additional borrowings of $27.0 million under the rental home credit facility, $20.0 million under the preferred interest, $18.8 million under the BFND credit facility, and $4.3 million of indebtedness assumed in connection with community acquisitions. Such interest expense increases resulting from additional borrowings were partially offset by lower interest rates on variable rate debt.

Interest Income.   Interesto

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. o

CALCULATION OF REGISTRATION FEE

(1)    Average monthly real estate revenue per occupied homesite defined as total real estate revenue divided by average total occupied homesites divided by the number of months in the period.

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(2)    Average monthly homeowner rental income per homeowner occupied homesite defined as homeowner rental income divided by average homeowner occupied homesites divided by the number of months in the period.

(3)    Average monthly real estate revenue per total homesite defined as total real estate revenue divide by average total homesites divided by the number of months in the period.

(4)    Real estate segment and homesite data excludes discontinued operations.

A reconciliation of our net segment income to net loss attributable to common unitholders is as follows:

(1)    Same communities real estate net segment income excludes results of communities acquired after January 1, 2002 and community sold before December 31, 2003.

(2)    Excludes segment results as a result of the restructuring in September 2003 in which we closed all stand-alone retail stores existing on January 1, 2003 at which time we had no significant in-community sales operations.

Liquidity and Capital Resources

Our principal liquidity demands have historically been, and, to a greater or lesser degree depending on the nature of the expenditures,  are expected to continue to be, recurring and non-recurring capital improvements of communities, debt repayment, the purchase of new and used homes for lease and sale, funding loans to home buyers, property acquisitions, and partnership interest distributions. We intend to meet these liquidity requirements through our working capital provided by operating activities, available financing under our floor plan line of credit for home purchases, our consumer finance facility to fund home loans, our lease receivables line of credit to be secured by homes in our rental portfolio, other available unsecured financing, and the potential net proceeds from the sale of communities. We consider these sources to be adequate to meet all operating requirements, including recurring capital improvements, debt service, other normally recurring expenditures of a capital nature and, if necessary and

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appropriate, payment of dividends to ARC’s stockholders to maintain qualification as a REIT in accordance with the Internal Revenue Code.

Our operating cash flows have not been sufficient to cover the distributions to our partners that were made since ARC’s IPO in February 2004. On May 23, 2005, we declared a reduced distribution to our partners for the second quarter of 2005. On September 21, 2005, ARC’s board of directors announced that no distributions would be made on the Partnership’s common partnership units for third quarter of 2005. ARC’s board of directors reviews our practices with respect to the payment of distributions on a quarterly basis. Should our operating cash flows not improve, we may need to take additional action with respect to the payment of distributions, which may include the further reduction or elimination of our distributions to our partners.

Our plan is to increase occupancy through the following activities, as well as other initiatives that may be available to us. To accomplish our plans and objectives for the next 12 months, we may invest significant funds for the purchase of manufactured homes for sale, rent and lease with option to purchase. We expect to commit to these expenditures only as demand warrants and funds permit and we have entered into no significant forward purchase commitments with respect to such purchases. We also plan to make recurring capital expenditures, as necessary and appropriate, to keep our communities up to our standards and for general capital improvements.

We expect to fund our short-term liquidity needs through net cash provided by operations, borrowings under our $50 million floorplan line of credit, borrowings under our lease receivables line of credit which was expanded from $75 million to $150 million in October 2005 and other sources of capital, including the net proceeds from the sale of up to 79 communities that we have identified as held for sale. We also have the ability to sell additional communities if conditions warrant.

In addition, in order to facilitate sales of new and existing homes, we also plan to finance a significant portion of our home sales during 2005. We have a $125 million consumer finance facility to support our in-community home sales financing program under which we may finance up to 90% of the principal amount of qualifying loans made to qualifying home buyers.

We have extended the maturity date of our $85 million revolving credit mortgage facility to September 2006, and expect to refinance or extend our senior variable rate mortgage when due in 2006. In addition to our existing sources of capital, we have significant experience in raising private equity and we may in the future use that experience to enter into financing joint ventures or other similar arrangements if we determine that such a structure would provide an efficient means of raising capital.

Not withstanding the foregoing and based on our historical results, we do not believe that we will be able to fully fund our debt service obligations and recurring capital expenditures, as well as our operating plans and objectives described above, out of operating cash flows. Accordingly, our ability to implement our plans and occupancy objectives described above will depend upon our ability to obtain adequate funding from the financing sources described above or from other available funding sources. We cannot assure that we will be able to sell any or all of the 79 communities currently held for sale or additional communities, sell new or used homes, borrow under our consumer finance line of credit, refinance expiring credit lines or make other arrangements necessary to fund some or all of our activities to increase occupancy. Should we not be able to obtain sufficient funds for these purposes, we may determine that it is necessary to substantially defer or eliminate some or all of our plans and growth objectives that require these funds,rmation incorporated by reference is considered to be a part of this prospectus, and information that ARC files later with the SEC will automatically update and supersede information contained in documents filed earlier with the SEC or contained in this prospectus. ARC incorporates by reference in this prospectus the documents listed below and any future filings made with the SEC under sections 13(a), 13(c), 14 or 15(d) of the Exchange Act until all of the securities offered hereby are sold:

·       Annual Report on Form 10-K/A for the fiscal year ended December 31, 2004;

·       Quarterly Reports on Form 10-Q for the quarters ended March 31 and June 30, 2005;

·       Current Reports on Form 8-K filed on January 12, March 18, March 23, April 5, April 12, May 9, May 23, June 10, July 19, July 29, August 1, August 9, August 22, August 23, September 13, September 27, October 19, and October 26, 2005; and

·       Description of ARC’s capital stock contained in its registration statement on Form 8-A filed on February 9, 2004.

Upon receipt of an oral or written request we will provide, free of charge, to any person to whom a prospectus is delivered, a copy of any or all of the information that has been incorporated by reference in the prospectus but not delivered with the prospectus, other than the exhibits to those documents. Please direct your written requests to: Investor Relations, Affordable Residential Communities Inc., 600 Grant Street, Suite 900, Denver, CO 80203. Please direct your oral requests to: Investor Relations at (866) 847-8931.

In addition, for as long as any of the notes remain outstanding and during any period in which we are not subject to Section 13 or Section 15(d) of the Exchange Act, we will make available to any prospective purchaser or beneficial owner of the securities in connection with the sale thereof that information required by Rule 144A(d)(4) under the Securities Act.

FOR NEW HAMPSHIRE RESIDENTS ONLY

NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION OR A LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE UNIFORM SECURITIES ACT WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED TO SELL SECURITIES IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.

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MARKET AND INDUSTRY DATA

Market data used or incorporated by reference in this prospectus is based on the good faith estimates of our management, which estimates are based upon their review of internal surveys, independent industry publications and other publicly available information. Although we believe these sources are reliable, we do not guarantee the accuracy or completeness of statements regarding the market and industry data presented or incorporated by reference in this prospectus. Our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the heading “Risk Factors.”

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act, as amended by the Private Securities Litigation R including community and home purchases, consumer loans, and non-recurring capital expenditures.

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Cash Flows

Comparison of the Six Months Ended June 30, 2005 to the Six Months Ended June 30, 2004

Cash provided by operations was $1.0 million for the six months ended June 30, 2005, as compared with $19.0 million for the same period in 2004. The decrease in cash provided by operations primarily was due to payments made in the first half of 2005 for substantial accruals incurred at the end of 2004 for capital expenditures and repairs and maintenance activities as compared to a relatively low level of such payments in the first half of 2004.

Cash used in investing activities was $39.2 million in the six months ended June 30, 2005, compared with $576.8 million for the same period in 2004. The decrease in cash used in investing activities primarily was due to the Hometown and D.A.M. portfolio acquisitions in the first half of 2004, as well as proceeds from community sales in the first half of 2005. Purchases and sales of homes are included in investing activities as these assets are considered by the company to be long-term revenue generating assets.

Cash provided by financing activities was $18.0 million in the six months ended June 30, 2005, compared with $579.0 million for the same period in 2004. The decrease in cash provided by financing activities primarily was due to the issuance of additional indebtedness and common and preferred unit issuances in connection with ARC’s IPO in the first half of 2004, as well as increases in the repayment of existing indebtedness and distribution payments in the first half of 2005.

Comparison of the Year Ended December 31, 2004 to the Year Ended December 31, 2003

Cash provided by operations was $27.0 million and $10.7 million for the years ended December 31, 2004 and 2003, respectively. The increase in cash provided by operations for 2004 as compared to 2003 was due primarily to increased homesites resulting from our Hometown and D.A.M. portfolio acquisitions.

Cash used in investing activities was $607.6 million and $47.7 million for the year ended December 31, 2004 and 2003, respectively. The increase in 2004 as compared to 2003 was due primarily to the Hometown and D.A.M. portfolio acquisitions and an increase in acquisitions of other communities and manufactured homes. Purchases and sales of homes are included in investing activities as these assets are considered by the company to be long-term revenue generating assets.

Cash provided by financing activities was $593.8 million and $25.4 million for the year ended December 31, 2004 and 2003, respectively. The increase in 2004 as compared to 2003 was primarily due to issuance of additional indebtedness and common and preferred partnership unit issuances in connection with ARC’s IPO, partially offset by the repayment of existing indebtedness and the payment of both common and preferred unit distributions.

Comparison of the Year Ended December 31, 2003 to the Year Ended December 31, 2002

Cash provided by operations was $10.7 million and $14.3 million for the year ended December 31, 2003 and 2002, respectively. The decrease for 2003 was due primarily to changes in operatieform Act of 1995. All statements, other than statements of historical facts, included in this prospectus that address results or developments that we expect or anticipate will or may occur in the future, where statements are preceded by, followed by or include the words “believes,” “expects,” “may,” “will,” “would,” “could,” “should,” “seeks,” “approximately,” “intends,” “plans,” “projects,” “estimates” or “anticipates” or the negative of these words and phrases or similar words ong assets and liabilities partially offset by a reduction in manufactured home inventory held for sale.

Cash used in investing activities was $47.7 million and $137.5 million for the year ended December 31, 2003 and 2002, respectively. The decrease in 2003 compared to 2002 was due primarily to reduced levels of community acquisitions and rental home purchases. Purchases and sales of homes are included in investing activities as these assets are considered by the company to be long-term revenue generating assets.

Cash provided by financing activities was $25.4 million and $137.8 million for the year ended December 31, 2003 and 2002, respectively. The decrease in 2003 as compared to 2002 was primarily due to lower borrowing for community acquisitions and rental homes, funds provided in 2002 from the

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reorganization and issuance of common partnership units, partially offset by funding of the rental home credit facility in 2003.

Inflation

Inflation in the U.S. has been relatively low in recent years and did not have a material impact on our results of operations for the three and six months ended June 30, 2005 and 2004 or the years ended December 31, 2004 and 2003. Although the impact of inflation has been relatively insignificant in recent years, it remains a factor in the United States economy and may increase the cost of acquiring or replacing property, plant, and equipment and the costs of labor and utilities.

Commitments

At June 30, 2005, adjusted for the effect of the offering of the notes, we had $1,049.3 million of pro forma consolidated indebtedness outstanding with the following repayment obligations (in thousands):

(1)    $140.5 million of senior variable rate mortgage debt due 2006 may be extended for three additional 12-month periods at our option and subject to certain conditions.

The fair value of debt outstanding as of June 30, 2005, adjusted for the effect of the offering of the notes, was approximately $1,076.4 million.

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Consolidated Indebtedness to be Outstanding After Our Offering

The following table sets forth certain information with respect to our pro forma consolidated indebtedness outstanding as of June 30, 2005 after giving effect to the sale of the notes and the discontinued operations resulting from the proposed sale of the 79 communities (dollars in thousands):

FFO

As defined by NAREIT, FFO represents income (loss) from continuing operations (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus real estate related depreciation and amortization (excluding amortization of loan origination costs) and after adjustments for unconsolidated partnerships and joint ventures. We present FFO because we consider it an important supplemental measure of our operating performance and believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs, many of which present FFO when reporting their results. FFO is intended to exclude GAAP historical cost depreciation and amortization of real estate and related assets, which assumes that the value of real estate assets diminishes ratably over time. Historically, however, real estate values have risen or fallen with market conditions. Because FFO excludes depreciation and amortization unique to real estate, gains and losses from property dispositions and extraordinary items, it provides a performance measure that, when compared year over year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, development activities and interest costs, providing perspective not immediately apparent from net income. We compute FFO in accordance with standards established by the Board of Governors of NAREIT in its March 1995 White Paper (as amended in November 1999 and April 2002), which may differ from the methodology for calculating FFO utilized by other equity REITs and, accordingly, may not be comparable to such other REITs. Further, FFO does not represent amounts available for management’s discretionary use because of nprogram, which could have an adverse effect on our financial condition and results of operations, and also could result in significant changes to the structure and terms of the program, which could increase the costs to us of continuing the program or otherwise adversely affect our ability to continue to maintain the program, which could have an adverse effect on our ability to increase occupancy and improve our results of operations.

We may not be able to maintain and improve our occupancy through expansion of our in-community home sales and financing initiative, which could adversely affect our revenues and our results of operations.

We have responded to the challenging operating environment for manufactured home communities by developing and implementing a range of programs and initiatives aimed at increasing and maintaining our occupancy, including our in-community home sales and financing initiative. Our ability to maintain and increase occupancy and improve our operating margins in our existing communities in the future will depend to some degree upon the success of this initiative. Through our in-community home sales and financing initiative, we intend to significantly expand our capability both to acquire for sale manufactured home inventory and sell these homes to customers in our communities at reasonable prices and to finance sales of these homes to customers in our communities. We have obtained a multiyear debt facility pursuant to which we will be able to fund up to $125.0 million to support loan originations in connection with the sale of homes in our communities. If we are not able to maintain this debt facility, we do not expect to be able to fully fund this initiative, which could significantly impair our ability to maintain or increase our occupancy in our communities and to achieve growth in our revenue and operating margins. Additionally, if we do not have sufficient capital available to purchase additional homes in the future, we may not be able to implement or fully implement these programs or initiatives, which could significantly impair our ability to maintain or increase our occupancy in our communities and to achieve growth in our revenues and operating margins.

The availability of advances of funds under our consumer finance debt facility is subject to certain conditions that are beyond our control. Conditions that could result in our inability to draw on this facility include a downgrade of the lender’s credit rating and the absence of certain markets for financing debt obligations secured by securities or mortgage loans. Funding under this facility may also be denied if the lender determines that the value of the assets serving as collateral would be insufficient to maintain the required 75% loan-to-value ratio upon giving effect to a request for funding. The lender can also at any time require that we prepay amounts funded or provide additional collateral if in its judgment this is necessary to maintain the 75% loan-to-value ratio.

Although some members of our management group have experience in the consumer finance business, we have limited operating history in the consumer finance business, and we cannot assure you

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that we will be able to successfully expand this initiative and manage this business. Loans produced by our in-community home sales and financing initiative may have higher default rates than we anticipate, and demand for consumer financing may not be as great as we anticipate or may decline.

Our in-community home sales and financing initiative operates in a regulated industry with significant licensing and consumer protection laws, and the regulatory framework may change in a manner that may adversely affect our operating results. The regulatory environment and associated consumer finance laws create a risk of greater liability from our in-community home sales and financing initiative and could subject us to private claims and awards. This initiative is dependent on licenses granted by state, federal and local regulatory bodies, which may be withdrawn or which may not be renewed and which could have an adverse impact on our ability to achieve our operating objectives. We have obtained many, and are in the process of obtaining all of the remaining state and local licenses and permits necessary for us to implement this initiative in all of the markets in which we operate.

The terms of our acquisition agreement with Hometown may cause us to incur additional costs and liabilities.

Pursuant to the acquisition agreement with Hometown, we have assumed all liabilities and obligations of Hometown with respect to the Hometown communities and the other acquired assets, whether known or unknown, absolute or contingent, and whether arising before or after the date we acquired the Hometown communities, subject to limited exceptions. In addition, Hometown is not required to indemnify us for any inaccuracy in or breach of any of its representations or warranties in the agreement. As a result of these provisions, we are responsible for liabilities and obligations with respect to the Hometown communities and the other acquired assets for which we have no recourse to Hometown or anyone else, and we may incur unanticipated costs in connection with the assumption and satisfaction of these obligations as well as in ownership and operation of the Hometown communities, in excess of our expected costs.

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.

The manufactured housing industry continues to face a challenging operating environment that has resulted in losses, exits from the industry and significant curtailment of activity among manufacturers, retailers and consumer finance companies. According to MHI, industry shipments (a measure of manufacturing production and wholesale sales) have declined from 372,843 homes in 1998 to 130,802 in 2004. We believe this ongoing period of challenging industry conditions was the result of an oversupply of consumer credit from 1994 to 1999, which led to over stimulation in the manufacturing, retail home sales and financing sectors of the industry. When compared to the manufacturing, retail home sales and consumer finance sectors of the manufactured housing industry, the manufactured home community sector has been relatively less affected by the oversupply of consumer credit but is also facing challenging conditions, including an increase in the number of repossessed and abandoned homes, a shortage of consumer financing to support new manufactured home sales and move-ins and resale of existing homes in manufactured home communities, and historically low mortgage interest rates and favorable credit terms for traditional entry-level, site-built housing, all of which has put downward pressure on occupancy levels in our manufactured home communities and may continue to do so. We expect industry conditions will remain difficult for the foreseeable future, based partly on overall economic conditions throughout the United States and a continued shortage of consumer financing for manufactured home buyers.

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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 had net losses attributable to common partnership unitholders of $36.0 million for the six months ended June 30, 2005 and $101.3 million, $39.9 million and $47.1 million for the years ended December 31, 2004, 2003 and 2002, respectively. As of June 30, 2005, our retained deficit was $330.4 million. There can be no assurance that we will not continue to incur net losses in the future, which could adversely affect our ability to service our indebtedness, including the notes, and our ability to pay dividends or make distributions, any of which could adversely affect the trading price of the notes and ARC’s common stock.

We may not be successful in identifying suitable acquisitions that meet our criteria, in completing such acquisitions, or in successfully integrating and operating acquired properties, which may impede our growth and negatively affect our results of operations.

Our ability to expand through acquisitions has historically been a significant part of our business expansion strategy and requires us to identify suitable acquisition candidates or investment opportunities that meet our criteria and are compatible with our growth strategy. We may not be successful in identifying suitable real estate properties or other assets that meet our acquisition criteria or in consummating acquisitions or investments on satisfactory terms. If we do not have sufficient capital, we may be limited or precluded from pursuing additional acquisitions. Also, a lack of sufficient depth of management may limit or preclude additional acquisitions. Failure to identify or consummate acquisitions will reduce the number of acquisitions we complete and slow our growth, which could in turn adversely affect our ability to service our indebtedness, including the notes, and ability to make distributions, any of which could adversely affect the trading price of the notes and ARC’s common stock.

Although we are currently less focused on community acquisition opportunities than in the past, we will continue to evaluate available manufactured home communities in select markets when strategic opportunities arise. Our ability to acquire properties on favorable terms and successfully integrate and operate them may be exposed to the following significant risks:

·       we may be unable to acquire a desired property because of competition from local investors and other real estate investors with significant capital, including other publicly traded REITs and institutional investment funds;

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accordance with GAAP) as an indicator of our financial performance or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends or make distributions.

The following table calculates our FFO for the three and six months ended June 30, 2005 and the years ended December 31, 2004, 2003 and 2002 (in thousands):

(1)    Our FFO for the six months ended June 30, 2004 includes $27.9 million of costs related to ARC’s IPO, financing transactions and the Hometown acquisition.

(2)    FFO for the year ended December 31, 2004 includes charges for the following: (i) retail losses of $11.2 million related to sales of older vacant homes sold during the fourth quarter at discounts to their original costs and marketing and promotion costs both incurred to drive occupancy, help establish and drive our Hispanic marketing initiative and reduce future repairs and maintenance costs in our rental home portfolio; (ii) $3.0 million of impairment charges related to older vacant rental homes we expect to sell in 2005 at prices less than their carrying value in order to continue to drive occupancy in specific markets and reduce repairs and maintenance costs in our rental home portfolio; (iii) $0.9 million of goodwill impairment related to our insurance business; (iv) $1.0 million of severance costs related to the fourth quarter resignation of our chief operating officer and the second quarter resignation of other executive officers; (v) approximately $500,000 of impairment charges related to three communities; and (vi) approximately $500,000 related to property damage sustained during the hurricanes that occurred in the third quarter in the Southeast United States.

(3)    FFO for the year ended December 31, 2003 includes a charge of $1.4 million for retail home sales asset impairment and other expense and a charge of approximately $864,000 for the cost of vacating unused office space and $337,000 in executive severance.

(4)    FFO for the year ended December 31, 2002 includes charges incurred in the reorganization in connection with the repayment of debt including $1.9 million for exit fees and $1.6 million for the write off of unamortized loan costs, and includes a charge of $13.6 million to write off goodwill associated with our retail home sales and insurance businesses. For more details see our consolidated financial statements for the years ended December 31, 2004, 2003 and 2002.

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Quantitative and Qualitative Disclosures About Market Risk

Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevalent market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. We use some derivative financial instruments to manage, or hedge, interest rate risks related to our borrowings. We do not use derivatives for trading or speculative purposes and only enter into contracts with major financial institutions based on their credit rating and other factors.

As of June 30, 2005, our pro forma debt outstanding was $1,049.3 million, comprised of $768.1 million of indebtedness subject to fixed interest rates and $281.2 million, or 26.8%, of our total consolidated debt, subject to variable interest rates. In February 2004 we entered into a two-year interest rate swap agreement pursuant to which we effectively fixed the base rate portion of the interest rate with respect to $100 million of our variable rate debt. As a result, approximately 80% of our total indebtedness is subject to fixed interest rates for a minimum of two years.

If LIBOR and the prime rate were to increase by 1.00%, the increase in interest expense on the variable rate debt would decrease future earnings and cash flows by approximately $3.2 million annually. If, after consideration of the interest rate swap agreement described above, LIBOR and the prime rate were to increase by 1.00%, the increase in interest expense on the variable rate debt would decrease future earnings and cash flows by approximately $2.2 million annually.

Interest risk amounts were determined by considering the impact of hypothetical interest rates on our financial instruments. These analyses do not consider the effect of any change in overall economic activity that could occur in that environment. Further, in the event of a change of that magnitude, we may take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, these analyses assume no changes in our financial structure.

The fair value of pro forma debt outstanding as of June 30, 2005 was approximately $1,076.4 million.

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AFFORDABLE RESIDENTIAL COMMUNITIES LP

BUSINESS AND PROPERTIES

Overview

The Partnership is a Delaware limited partnership whose sole general partner is ARC. As of June 30, 2005, ARC owned approximately 94.8% of the Partnership’s outstanding partnership interests. ARC is a fully integrated, self-administered and self-managed Maryland corporation that elected to be taxed as a real estate investment trust, or REIT.

We acquire, renovate, reposition and operate primarily all-age manufactured home communities. We also lease with the option to purchase, rent and sell manufactured homes, finance sales of manufactured homes and act as agent in the sale of homeowners’ insurance and other related insurance products, all exclusively to residents and prospective residents in our communities.

As of June 30, 2005, we owned and operated 315 manufactured home communities (excluding one community held for sale) in 27 states containing 62,942 homesites. These properties are located in 67 markets across the United States. Our five largest markets are Dallas/Fort Worth, Texas, with 11.5% of our total homesites; Atlanta, Georgia, with 7.9% of our total homesites; Salt Lake City, Utah, with 6.0% of our total homesites; the Front Range of Colorado, with 5.2% of our total homesites; and Kansas City/Lawrence/Topeka, Kansas/Missouri with 3.9% of our total homesites. On September 21, 2005, ARC’s board of directors authorized the sale of up to 79 communities in 33 markets, either at auction or through various negotiated sales. Following these sales and assuming that all these communities are sold, ARC will continue to own approximately 237 communities that it believes meet its business plan objectives and operating strategy objectives. After taking into account the proposed sale of these communities, on a pro forma basis as of June 30, 2005, our five largest markets are Dallas/Fort Worth, Texas, with 13.1% of our total homesites; Atlanta, Georgia, with 10.0% of our total homesites; Salt Lake City, Utah, with 7.6% of our total homesites; the Front Range of Colorado, with 6.6% of our total homesites; and Jacksonville, Florida, with 4.5% of our total homesites. See “Affordable Residential Communities LP Selected Consolidated Historical and Pro Forma Financial Data” and “Selected Unaudited Pro Forma Financial Data” for a further discussion of the anticipated effect on the Partnership and ARC of these sales and the sale of the notes.

ARC’s predecessor was formed in 1995. In the first quarter of 2004, ARC completed its initial public offering, or IPO, of 25,300,209 shares of ARC common stock (including 2,258,617 shares sold by selling securityholders) and 5,000,000 shares of ARC’s 8.25% Series A cumulative redeemable preferred stock. In conjunction with the IPO, we also completed a financing transaction involving Merrill Lynch Mortgage Capital Inc., an affiliate of the initial purchaser of the notes, consisting of $500 million of new mortgage debt and the repayment of some of our existing indebtedness. We used a portion of the proceeds from ARC’s IPO and the financing transaction to acquire 90 manufactured home communities from Hometown America, L.L.C., or Hometown. See Note 3 to the Partnership’s annual audited financial statements included in this prospectus for a further discussion of the Hometown acquisition.

Our principal executive, corporate and property management offices are located at 600 Grant Street, Suite 900, Denver, Colorado 80203, and our telephone number is (303) 383-7500. Our internet address is www.aboutarc.com. The information contained on our website is not part of this prospectus.

Our Business Objectives

Our principal business objectives are to achieve sustainable long-term growth in cash flow per share and to maximize returns to our stockholders. Our key operating objectives include the following:

Community Renovation and Repositioning.   We utilize a comprehensive four-stage process that we call B-F-F-R to renovate and reposition the communities we acquire and improve their operating

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performance. B-F-F-R stands for: Buy—acquisition, Fix—physical infrastructure and resident quality, Fill—occupancy level, Run—ongoing, long-term operations. Our prior acquisitions generally have targeted communities that demonstrate opportunities for improvement in operating results due to one or more of the following characteristics:

·       below market rate leases;

·       high operating expenses;

·       poor infrastructure and quality of residents;

·       inadequate capitalization; or

·       a lack of professional management.

While community acquisition opportunities have historically been a significant focus of our activities, we are currently less focused on such opportunities and more focused on community operations.

With respect to the other stages of the B-F-F-R process, we have established district and regional management that has a sufficiently limited span of control to allow for strong focus on community development. We have also established a mobile management team positioned to address specific issues related to particular markets and drive new programs. We focus on our communities utilizing B-F-F-R according to their relative occupancy levels as follows:

·       For communities above 90% occupancy, we primarily focus on improving operating margins through expense and overhead management, utility recovery and creation of additional revenue sources (as of June 30, 2005, 131 communities with 23,222 homesites averaging 96% occupancy, or, on a pro forma basis, after giving effect to the proposed sale of 79 communities with 20,246 homesites averaging 95.5% occupancy);

·       For communities between 80% and 90% occupancy, we focus on sales and leasing activities, resident retention and delivering the necessary homes to the community to allow for occupancy growth (as of June 30, 2005, 96 communities with 20,331 homesites averaging 86% occupancy, or, on a pro forma basis, after giving effect to the proposed sale of 79 communities, 77 communities with 17,262 homesites averaging 85.9% occupancy); and

·       For communities below 80% occupancy, we focus on developing community management and sales staff, making capital expenditures, supplying necessary homes to provide for occupancy growth and establishing resident standards with respect to behavior and rent payment (as of June 30, 2005, 47 communities with 10,057 homesites between 70% and 80% occupancy averaging 76% occupancy and another 41 communities with 9,332 homesites below 70% occupancy averaging 63% occupancy, or, on a pro forma basis, after giving effect to the proposed sale of 79 communities, 28 communities with 6,825 homesites between 70% and 80% averaging 76% occupancy and another 21 communities with 5,135 homesites below 70% averaging 64.3% occupancy).

Significant Presence in Key Markets.   As of June 30, 2005, approximately 69% of our homesites were located in our 20 largest markets. Upon completion of the proposed sale of the 79 communities, approximately 79% of our homesites will be in our 20 largest markets. We believe we have a leading market share in 15 of these markets, based on number of homesites. To the extent that we acquire new communities, we focus our growth in select markets characterized by limited development, expensive alternative housing costs, a strong, diversified economic base and/or opportunity to increase our market share and achieve economies of scale. Increasing our presence and market share enables us to (i) achieve operating efficiencies and economies of scale by leveraging our local property management infrastructure and other operating overhead over a larger number of communities and homesites, (ii) provide potential residents with a broader range of affordable housing options in their market, (iii) increase our visibility and brand recognition and leverage advertising costs and (iv) obtain more favorable terms and faster

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turnaround time on construction, renovation, repairs and home installation services. We believe the significant size and geographic diversity of our portfolio reduces our exposure to risks associated with geographic concentration, including the risk of economic downturns or natural disasters in any one market in which we operate.

Broad Based Marketing Efforts.   We have developed and implemented a number of marketing initiatives to enhance the visibility of our communities, maintain and improve our occupancy, and identify, reward and lengthen the lease duration of our good customers. We have active marketing and sales teams at both the corporate and local market level. Our home lease with option to purchase program allows residents who might not otherwise qualify for home ownership through traditional purchase or financing avenues the opportunity to work towards home ownership while they lease. Our ability to provide financing to our residents and prospective residents is supported by our consumer finance facility. We have also established a Hispanic marketing initiative targeted at addressing the specific needs and cultural preferences of the fastest growing segment of the U.S. population.

Proactive Management to Maximize Occupancy.   In response to challenging industry conditions, particularly the shortage of available consumer financing for the purchase of manufactured housing, we have developed and implemented a range of programs aimed primarily at increasing and maintaining our occupancy, improving resident satisfaction and retention, increasing revenue and improving our operating margins. We focus on converting long-term renters into homeowners and improving occupancy through the sale of older homes for cash, the financing of sales of newer homes and the leasing of newer homes with an option to purchase.

Customer Satisfaction and Quality Control.   Our goal is to meet the needs of our residents or prospective residents for housing alternatives in a clean and attractive environment at affordable prices. We have established a nationwide call center with bilingual staff to manage resident communications and enhance our sales and marketing efforts. We approach our business with a consumer product focus having an emphasis on value and quality for our residents and prospective residents. We have quality assurance programs executed through employee training and adherence to guidelines developed by our senior management, based in part upon surveys of our customers. Our customer focus and quality controls are designed to provide consistency and quality of product and to enable our community managers to effectively market our communities and improve occupancy and resident retention across our portfolio.

Community Acquisitions/Dispositions.   Over the last ten years, ARC has acquired over 340 communities with over 70,000 homesites. We have invested in dedicated resources, including acquisition, due diligence, construction and marketing teams which allowed us to significantly broaden our acquisition prospects, incorporating stabilized and non-stabilized communities. We have compiled a proprietary computer database containing detailed information on over 28,000 manufactured home communities located throughout the United States, which enables us to take advantage of acquisition opportunities quickly, often before the community has been marketed publicly. However, while community acquisition opportunities have historically been a significant focus of our activities, we are currently less focused on such opportunities and more focused on community operation. In addition, we also sold more than 30 communities, and have announced plans to sell up to an additional 79 communities, when it became evident that these communities did not fit our market or performance objectives. We continue to evaluate our property portfolio and may sell additional properties in the future.

Key Programs and Initiatives

Home Rental Program.   Our real estate segment revenue consists of homeowner rental income, home renter rental income and utility and other income. We receive homeowner rental income from homeowners who lease homesites in our communities, and we receive home renter rental income from persons who rent manufactured homes and homesites from us in our communities pursuant to our home rental program and our home lease with option to purchase program. For the six months ended June 30,

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partners under Delaware law in connection with the management of the Partnership. ARC’s duties as general partner may come into conflict with the duties of its directors and officers to ARC. The Partnership’s partnership agreement does not require us to resolve such conflicts in favor of either ARC or the Partnership’s limited partners.

Unless otherwise provided for in the relevant partnership agreement, Delaware law generally rER='jmsproofassembler',CD='Oct 26 14:06 2005' -->

2005, and the year ended December 31, 2004, home renter rental income totaled $22.9 million, or approximately 20% of our total real estate revenue, and $40.3 million, or approximately 20% of our total real estate revenue, respectively, and homeowner rental income totaled $78.7 million, or approximately 70% of our total real estate revenue, and $145 million, or approximately 71% of our total real estate revenue, respectively. At June 30, 2005, we owned a total of 8,718 homes in our communities with acquisition and improvement costs of $249.2 million, which are rented, available for rent or for sale. These homes had an occupancy rate of approximately 86% at June 30, 2005. We intend to continue to expand our home rental program in the future.