UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2005

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.

(Exact name of registrant as specified in its charter)

Maryland		47-0858301
(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		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)

     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 whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2 of the Exchange Act).

YES þ            NO o

     As of August 1, 2005, there were 10,510,558 outstanding shares of the registrant’s common stock.

 

 

AMERICA FIRST APARTMENT INVESTORS, INC.

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004			1
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2005 and 2004			2
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and 2004			3
Notes to the Condensed Consolidated Financial Statements			4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			9
Item 3. Quantitative and Qualitative Disclosures about Market Risk			20
Item 4. Controls and Procedures			20
PART II — OTHER INFORMATION
Item 1.Legal Proceedings			21
Item 4. Submission of Matters to a Vote of Security Holders			21
Item 6.Exhibits			21
SIGNATURES			23

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except shares and per share amounts)

		June 30,				December 31,
		2005				2004
Assets
Cash and cash equivalents		$	11,742			$	10,634
Restricted cash			8,336				8,039
Real estate assets:
Land			33,224				33,224
Buildings			227,174				226,512
Total			260,398				259,736
Less: accumulated depreciation			(41,629	)			(37,399	)
Real estate assets, net			218,769				222,337
Investments in agency securities, at fair value			22,209				26,192
Investments in corporate equity securities, at fair value			4,282				4,321
In-place lease intangibles, net of accumulated amortization of $4,631 and $2,465, respectively			406				2,572
Assets of discontinued operations			17,851				18,165
Other assets			5,024				5,137
Total assets		$	288,619			$	297,397
Liabilities
Accounts payable and accrued expenses		$	7,919			$	7,039
Dividends payable			2,628				2,628
Notes payable			2,413				2,413
Bonds and mortgage notes payable			166,523				167,150
Liabilities of discontinued operations			—				—
Borrowings under repurchase agreements			25,875				27,875
Total liabilities			205,358				207,105
Commitments and Contingencies
Stockholders’ Equity
Common stock, $0.01 par value; 500,000,000 shares authorized, 10,510,558 issued and outstanding			105				105
Additional paid-in capital			102,774				102,766
Accumulated deficit			(19,372	)			(12,628	)
Accumulated other comprehensive income (loss)			(246	)			49
Total stockholders’ equity			83,261				90,292
Total liabilities and stockholders’ equity		$	288,619			$	297,397

The accompanying notes are an integral part of the condensed consolidated financial statements.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share amounts)

		For the Three				For the Three				For the Six				For the Six
		Months ended				Months ended				Months ended				Months ended
		June 30, 2005				June 30, 2004				June 30, 2005				June 30, 2004
Revenues:
Rental revenues		$	11,141			$	6,791			$	21,955			$	11,909
Interest and dividend income			196				178				376				360
Gain on sales of corporate equity securities			—				143				—				143
Other income			68				—				166				—
Total revenues			11,405				7,112				22,497				12,412
Expenses:
Real estate operating			5,247				3,702				10,246				6,409
Depreciation			2,139				1,325				4,283				2,393
Interest			2,110				1,121				4,092				2,035
General and administrative			1,449				761				3,083				1,263
Amortization expense			953				424				2,269				496
Total expenses			11,898				7,333				23,973				12,596
Loss from continuing operations			(493	)			(221	)			(1,476	)			(184	)
Income (loss) from discontinued operations			(14	)			20				(12	)			2
Net Loss		$	(507	)		$	(201	)		$	(1,488	)		$	(182	)
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities arising during the period			107				(12	)			(166	)			(705	)
Less: Reclassification adjustments for gains realized in net loss			—				(143	)			—				(143	)
Unrealized losses on derivatives			(218	)			—				(129	)			—
			(111	)			(155	)			(295	)			(848	)
Comprehensive loss		$	(618	)		$	(356	)		$	(1,783	)		$	(1,030	)
Earnings per share- basic and diluted
Loss from continuing operations		$	(0.05	)		$	(0.03	)		$	(0.14	)		$	(0.03	)
Income from discontinued operations			(0.00	)			0.00				(0.00	)			0.00
Net Loss		$	(0.05	)		$	(0.03	)		$	(0.14	)		$	(0.03	)
Dividends declared per share		$	0.25			$	0.25			$	0.50			$	0.50
Weighted average number of shares outstanding — basic and diluted			10,511				6,746				10,511				5,910

The accompanying notes are an integral part of the condensed consolidated financial statements.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)

		For the Six Months Ended June 30,
		2005				2004
Operating activities
Net loss		$	(1,488	)		$	(182	)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation			4,283				2,393
Change in fair value on interest rate swap agreements			196				(81	)
Amortization expense			2,269				496
Amortization of premium on agency securities			81				146
Non cash stock option compensation			8				12
Change in other assets			(114	)			1,025
Change in accounts payable and accrued expenses			1,277				494
Net cash provided by operating activities			6,512				4,303
Investing activities
Real estate capital improvements and acquisitions			(1,000	)			(133	)
Principal received on agency securities			3,776				6,168
Change in restricted cash			(297	)			(1,191	)
Proceeds from sales of corporate equity securities			—				2,718
Acquisition of America First Real Estate Investment Partners, LP			—				(3,532	)
Cash received in acquisition of America First Real Estate Investment Partners, LP			—				8,399
Acquisition of agency securities			—				(1,565	)
Net cash provided by investing activities			2,479				10,864
Financing activities
Dividends paid			(5,255	)			(2,537	)
Repayments of borrowings under repurchase agreements			(2,000	)			(3,744	)
Principal payments on bonds and mortgage notes payable			(628	)			(481	)
Net cash used in financing activities			(7,883	)			(6,762	)
Net increase in cash and cash equivalents			1,108				8,405
Cash and cash equivalents at beginning of period			10,634				6,918
Cash and cash equivalents at end of period		$	11,742			$	15,323
Supplemental disclosure of cash flow information:
Dividends declared but not paid		$	2,628			$	2,626
Cash paid for interest		$	4,278			$	2,067

Supplemental disclosure of non-cash investing and financing activities (in thousands):

On June 3, 2004, the Company merged with America First Real Estate Investment Partners, L.P. (“AFREZ”). Merger consideration included $3,532 in cash paid, $513 of additional merger costs incurred and 5,430,661 shares of stock with a value of $55,338 issued in exchange for the limited partner and general partner interests of AFREZ.

The accompanying notes are an integral part of the condensed consolidated financial statements.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(UNAUDITED)

1. Organization and Basis of Presentation

America First Apartment Investors, Inc. (the “Company”) is a Maryland corporation which owns and operates multifamily apartment projects and an office warehouse facility. The Company also invests in agency 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 accompanying interim unaudited consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted according to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. The consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. In the opinion of management, all normal and recurring adjustments necessary to present fairly the financial position as of June 30, 2005, and the results of operations for all periods presented have been made. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.

The 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 GAAP 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.

2. Assets Held for Sale and Discontinued Operations

As of June 30, 2005, the Company designated two communities, Park Trace Apartments and The Retreat Apartments, as held for sale pursuant to Statement of Financial Accounting Standards No. 144, Accounting for Impairment or Disposal of Long-Lived Assets. The Company has entered into sale and purchase agreements to sell the real estate assets of the Park Trace Apartments and The Retreat Apartments for $14.5 million and $8.7 million, respectively. Each transaction is expected to close during the third quarter. As such, the results of operations from these communities have been classified as income from discontinued operations for all periods presented.

On December 15, 2004, the Company completed the sale of The Glades Apartments, for a sales price of $20 million; as such the results of operations from June 4, 2004 (date of acquisition) through June 30, 2004 are presented as discontinued operations.

Summary results of operations for the aforementioned properties are as follows (in thousands):

		Three months ended								Six months ended
		June 30, 2005				June 30, 2004				June 30, 2005				June 30, 2004
Revenues		$	805			$	1,045			$	1,633			$	1,874
Expenses			819				1,025				1,645				1,872
Income (loss) from discontinued operations		$	(14	)		$	20			$	(12	)		$	2

The net book value of the real estate assets held for sale was $17.9 million and $18.2 million as of June 30, 2005 and December 31, 2004, respectively.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(UNAUDITED)

3. Borrowings under Repurchase Agreements

Borrowings under repurchase agreements as of June 30, 2005 and December 31, 2004 consisted of the following (in thousands):

		Interest				Maturity						Carrying Amount
Collateral		Rate				Date				Payment Schedule		June 30, 2005				Dec. 31, 2004
Repurchase agreements collateralized by agency securities:
FNMA Pool #759197			2.36	%			09/13/2005			Interest payments and principal due at maturity		$	16,400			$	16,400
FNMA Pool #670676			3.20	%			07/25/2005			Interest payments and principal due at maturity			2,500				4,500
													18,900				20,900
Other repurchase agreements:
The Ponds at Georgetown GNMA Certificate			3.65	%			09/28/2005			Interest payments due quarterly, principal due at maturity			6,975				6,975
												$	25,875			$	27,875

The Company renewed the repurchase agreement due July 25, 2005 with a new agreement, which pays interest at 3.65%, due October 24, 2005.

4. Transactions with Related Parties

Advisory Agreement

America First Apartment Advisory Corporation (the “Advisor”) operates under an Advisory Agreement (“the Agreement”) with the Company, 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 (in thousands):

		Three months ended								Six months ended
		June 30, 2005				June 30, 2004				June 30, 2005				June 30, 2004
Administrative Fees(1)		$	395			$	215			$	783			$	435
Administrative Fees-Agency Securities(2)			5				21				37				52
Property Management Fees(3)			—				314				—				559
Out of Pocket costs(4)			777				916				1,337				1,126

⁽¹⁾ 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 a predecessor to the Company; (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 value of the AFREZ properties on the date of the merger of AFREZ with and into the Company. Such fees are included in General and administrative expenses in the Consolidated Statements of Operations.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(UNAUDITED)

⁽²⁾ 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 plus 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 (5.22% for the month ended June 30, 2005).

⁽³⁾Property Management Fees- Until November 8, 2004, an affiliate of the Advisor, America First Properties Management Company L.L.C. (“AFP”), provided property management services for the multifamily properties owned by the Company. The fees for services provided represented the lower of: (i) costs incurred in managing the properties, or (ii) customary fees for such services determined by reference to national statistics. 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 AFP and its parent, America First Companies, L.L.C. (“America First Companies”). As a result of this transaction, the management of all of the Company’s properties was internalized and therefore no further management fees will be incurred.

⁽⁴⁾ Reimbursement of Out-of-Pocket Expenses- The Company reimburses the Advisor 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.

Included in accounts payable and accrued expenses in the Consolidated Balance Sheets are amounts due to the Advisor and its affiliate for administrative fees and reimbursed costs and expenses of approximately $154,000 and $162,000 as of June 30, 2005 and December 31, 2004, respectively.

5. 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 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 per share. 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.

Stock option activity for the six month period ended June 30, 2005 is summarized as follows:

		Number of				Weighted Average
		Shares				Exercise Price
Balance at December 31, 2004			30,000			$	8.73
Granted			—				—
Cancelled			—				—
Balance at June 30, 2005			30,000			$	8.73
Options exercisable at June 30, 2005			22,500			$	8.73

As of June 30, 2005, all outstanding options have an exercise price of $8.73 per share and a remaining contractual life of 7.6 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 per share estimated fair value of the options granted on their grant date during the quarter ended

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(UNAUDITED)

March 31, 2003 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 $4,100 and $8,200 for the three and six month periods ended June 30, 2005, and $6,900 and $12,400 for the three and six month periods ended June 30, 2004. Payments on the DERs for options not exercised are charged to earnings when declared and were $5,600 and $11,200 for the three and six month periods ended June 30, 2005, respectively, and $5,000 and $10,000 for the three and six month periods ended June 30, 2004.

6. Net Income (Loss) Per Share

For the three and six months ended June 30, 2005 and 2004, stock options were excluded from the computation of diluted net loss per share due to their antidilutive effect. There were 30,000 potentially dilutive securities as of June 30, 2005.

7. Segment Reporting

The Company’s reportable segments consist of: (i) its multifamily apartment properties; (ii) its commercial property; (iii) its investment in agency securities, and (iv) other, which includes Company overhead and consolidating entries.

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 net income.

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 net income at the commercial property level.

The Company assesses the performance of its investment in agency securities based on its net income earned on these securities. Net income is calculated as agency securities interest income, less premium amortization, interest expense incurred on the financing used to acquire these securities and administrative and incentive fees. All of the Company’s agency securities are combined into one reportable segment for this purpose.

The Company does not derive any of its consolidated revenues from foreign countries and does not have any major tenants that individually account for 10% or more of the Company’s consolidated revenues.

The following table details certain key financial information for the Company’s reportable segments for the three and six months ending June, 2005 and 2004 (in thousands):

		Three months ended								Six months ended
		June 30, 2005				June 30, 2004				June 30, 2005				June 30, 2004
Total revenue
Multifamily		$	10,975			$	6,633			$	21,635			$	11,581
Commercial			165				158				319				328
Agency securities			49				97				109				228
Other			216				224				434				275
Total revenue		$	11,405			$	7,112			$	22,497			$	12,412
Net income (loss)
Multifamily		$	782			$	331			$	1,221			$	794
Commercial			7				4				30				6
Agency securities			49				97				109				228
Other			(1,345	)			(633	)			(2,848	)			(1,210	)
Net income (loss)		$	(507	)		$	(201	)		$	(1,488	)		$	(182	)

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(UNAUDITED)

8. 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 Company’s financial statements.

9. Subsequent Event

On August 3, 2005 the Company completed its acquisition of Tregaron Oaks, LLC, a 300 unit apartment complex located in Bellevue, Nebraska for $19 million. The acquisition was partially financed with a 10-year, $12.4 million mortgage note that bears interest at 5.1%. The note requires monthly interest payments of $52,779. The remainder of the purchase price was paid with cash on hand.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

Item 2. 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 the Company’s Annual Report on Form 10-K as of December 31, 2004.

General

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. which merged with the Company as of January 1, 2003.

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.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

The following table sets forth certain information regarding the Company’s real estate properties as of June 30, 2005 and for the three months then ended:

								Average				Number				Percentage
				Number				Square Feet				of Units				of Units				Economic
Property Name		Location		of Units				Per Unit				Occupied				Occupied				Occupancy (2)
Arbor Hills		Antioch, TN			548				827				501				91	%			79	%
Belvedere Apartments		Naples, FL			162				829				160				99	%			94	%
Bluff Ridge Apartments		Jacksonville, NC			108				873				106				98	%			94	%
Brentwood Oaks Apartments		Nashville, TN			262				852				255				97	%			89	%
Coral Point Apartments		Mesa, AZ			337				780				318				94	%			81	%
Covey at Fox Valley		Aurora, IL			216				948				184				85	%			70	%
Delta Crossing		Charlotte, NC			178				880				173				97	%			69	%
Elliot’s Crossing Apartments		Tempe, AZ			247				717				235				95	%			74	%
Fox Hollow Apartments		High Point, NC			184				877				154				84	%			72	%
Greenbriar Apartments		Tulsa, OK			120				666				111				92	%			84	%
Highland Park Apartments		Columbus, OH			252				891				245				97	%			84	%
The Hunt Apartments		Oklahoma City, OK			216				693				202				93	%			90	%
Huntsview Apartments		Greensboro, NC			240				875				219				91	%			79	%
Jackson Park Place Apartments		Fresno, CA			296				822				279				94	%			91	%
Lakes of Northdale Apartments		Tampa, FL			216				873				207				96	%			88	%
Littlestone of Village Green		Gallatin, TN			200				987				188				94	%			80	%
Misty Springs Apartments		Daytona Beach, FL			128				786				128				100	%			94	%
Monticello Apartments		Southfield, MI			106				1027				97				91	%			81	%
Oakhurst Apartments		Ocala, FL			214				790				209				98	%			94	%
Oakwell Farms Apartments		Nashville, TN			414				800				394				95	%			79	%
Park at Countryside		Port Orange, FL			120				720				118				98	%			93	%
The Park at 58 Apartments		Chattanooga, TN			196				876				149				76	%			72	%
Park Trace Apartments		Norcross, GA			260				806				252				97	%			72	%
The Ponds at Georgetown		Ann Arbor, MI			134				1002				117				88	%			78	%
The Retreat		Atlanta, GA			226				855				208				92	%			69	%
St. Andrews at Westwood Apts		Orlando, FL			259				836				256				99	%			88	%
Shelby Heights		Bristol, TN			100				980				96				96	%			92	%
Waterman’s Crossing		Newport News, VA			260				944				254				98	%			94	%
Waters Edge Apartments		Lake Villa, IL			108				814				92				85	%			75	%
					6,307				849				5,907				94	%			82	%
The Exchange at Palm Bay		Palm Bay, FL			72,007	(1)			n/a				63,393				88	%			n/a

(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 quarter ended June 30, 2005. 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.

Executive Summary

For the past several years, the Company’s financial results have been negatively impacted by soft market conditions attributable to weak economic conditions, overbuilding of multifamily housing properties and record low interest rates available to purchasers of single family housing. During the first six months of 2005, market conditions have begun to improve for multifamily housing in many of the markets in which our properties are located. Demand for apartments in some markets has improved due to job growth, which has lead to the creation of new households. Even though home mortgage rates continue to remain relatively low, the creation of new households has strengthened demand for rental housing, especially among newly formed households. While demand has strengthened in many markets, other factors have reduced the supply of available apartments. In particular, the trend toward condominium conversion in Florida has taken a number of rental units out of the market. In addition, the supply of new apartments coming into the market has slowed somewhat.

As property performance drives the overall financial results for the Company, it is important to examine a few key property performance measures. The following are four high level performance measures management uses to gauge the overall performance of our property portfolio.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

Physical occupancy, economic occupancy, average annual rent per unit, and real estate operating contribution are performance measures that provide management an indication as to the quality of rental revenues. Physical occupancy is calculated simply as the percentage of units occupied out of the total units owned. Economic occupancy is calculated as the net rental revenue divided by the gross potential rental revenue which could be derived from the property portfolio. Economic occupancy is reflective of vacancy, rental concessions, delinquent rents, bad debts and non-revenue units such as model units. The average annual rent per unit is calculated as the total annualized net rental revenue divided by the total number of units owned. Real estate operating contribution is calculated as the excess of rental revenues over real estate operating expenses as a percentage of rental revenues. It provides management an indication as to the ability of the properties to manage operating expenses in the current occupancy environment.

The following table presents these measures as of the dates indicated.

		Three months ended								Six months ended
		June 30,				June 30,				June 30,				June 30,
		2005				2004				2005				2004
Physical Occupancy			94	%			94	%			93	%			93	%
Economic Occupancy			82	%			81	%			82	%			81	%
Average Annual Rent Per Unit		$	7,387			$	7,228			$	7,337			$	7,125
Real Estate Operating Contribution			53	%			45	%			53	%			46	%

As reflected in the above figures, the strengthening demand for apartments, along with a tightening of the supply of available rental units, has allowed us to maintain physical occupancy at our properties while at the same time improving economic occupancy rates and average annual rent per unit through higher rental rates and a reduced need to offer rental concessions.

Results of Operations

The following discussion of the Company’s results of operations for the three and six months ended June 30, 2005 should be read in conjunction with the consolidated financial statements and notes thereto included in Item 1 of this report as well as the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

Three Months Ended June 30, 2005 Compared to the Three Months Ended June 30, 2004 (in thousands)

		For the Three				For the Three
		Months Ended				Months Ended				Dollar				Percentage
		June 30, 2005				June 30, 2004				Change				Change
Revenues
Rental revenues		$	11,141			$	6,791			$	4,350				64	%
Other			264				321				(57	)			(18	)%
Total Revenues			11,405				7,112				4,293				60	%
Expenses
Real estate operating			5,247				3,702				1,545				42	%
Depreciation			2,139				1,325				814				61	%
Interest			2,110				1,121				989				88	%
General and administrative			1,449				761				688				90	%
Amortization expense			953				424				529				125	%
Total Expenses			11,898				7,333				4,565				62	%
Loss from continuing operations		$	(493	)		$	(221	)		$	(272	)			123	%

     Rental revenues. Rental revenues increased by approximately $4.4 million primarily due to the properties acquired in the merger with AFREZ and the purchase of Arbor Hills. The AFREZ properties were acquired in June of 2004, and therefore were only included in the results of operations for one month in 2004. The inclusion of two additional months in 2005 resulted in increased revenues of $3.2 million. Arbor Hills, acquired in December of 2004, increased revenues by $920,000. Increases in economic

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

occupancy resulted in increased revenues of approximately $200,000 at properties held by the Company prior to the merger with AFREZ.

     Other revenues. Other revenues in 2005 include interest and dividend income and revenues earned from property management fees from unaffiliated parties. In 2004, other revenues included a gain of $143,000 on the sale of corporate equity securities, as well as interest and dividend income.

     Real estate operating expenses. Operating expenses increased by $1.5 million from the three months ended June 30, 2004. Operating expenses associated with the properties acquired in the merger with AFREZ and the purchase of Arbor Hills increased operating expenses by $1.9 million. This increase is partially offset by the elimination of management fees, which amounted to $308,000 during the period ending June 30, 2005. Management fees were eliminated with the internalization of the property management operations in November 2004 and include fees related to the former AFREZ properties for the month ending June 30, 2004.

     Depreciation expense. The increase is attributable to the acquisition of properties in the merger with AFREZ and the purchase of Arbor Hills. 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 2004.

     Interest expense. Interest expense represents interest paid and other expenses associated with the taxable and tax-exempt mortgage debt incurred to finance the Company’s investments in multifamily apartment properties. The increase in interest expense for the period is attributable to the debt assumed in the merger with AFREZ and the acquisition of Arbor Hills.

     General and administrative expenses. General and administrative expenses increased by $688,000 from the three months ended June 30, 2004. Salaries and benefit related costs accounted for $245,000 of the increase, of which approximately $200,000 was due to the internalization of the property management operations. Administrative fees paid to the Advisor increased by $180,000 as a result of the merger with AFREZ. The remainder of the increase is attributable to increases in consulting fees, directors and officer’s insurance and professional fees.

     Amortization expense. Amortization expense includes the amortization of in-place lease intangibles and debt financing costs. There was one month of such amortization related to the AFREZ merger in 2004. As of June 30, 2005, there remains $406,000 of unamortized in-place lease intangibles. This amount will be fully amortized by December 31, 2005.

Six Months Ended June 30, 2005 Compared to the Six Months Ended June 30, 2004 (in thousands)

		For the Six				For the Six
		Months Ended				Months Ended				Dollar				Percentage
		June 30, 2005				June 30, 2004				Change				Change
Revenues
Rental revenues		$	21,955			$	11,909			$	10,046				84	%
Other			542				503				39				8	%
Total Revenues			22,497				12,412				10,085				81	%
Expenses
Real estate operating			10,246				6,409				3,837				60	%
Depreciation			4,283				2,393				1,890				79	%
Interest			4,092				2,035				2,057				101	%
General and administrative			3,083				1,263				1,820				144	%
Amortization expense			2,269				496				1,773				357	%
Total Expenses			23,973				12,596				11,377				90	%
Loss from continuing operations		$	(1,476	)		$	(184	)		$	(1,292	)			702	%

     Rental revenues. Rental revenues increased by approximately $9.6 million due to the properties acquired in the merger with AFREZ and the purchase of Arbor Hills. Increases in economic occupancy resulted in increased rental revenues of approximately $400,000 at properties held by the Company prior to the merger with AFREZ.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

     Other revenues. Other revenues in 2005 include interest and dividend income, and revenues earned from property management fees from unaffiliated parties. In 2004, other revenues included a gain of $143,000 on the sale of corporate equity securities, as well as interest and dividend income.

     Real estate operating expenses. Operating expenses increased by $4.6 million due to the properties acquired in the merger with AFREZ and the purchase of Arbor Hills. This increase is offset by the elimination of management fees, which amounted to $545,000 during the period ending June 30, 2005. Management fees were eliminated with the internalization of the property management operations in November 2004 and include fees related to the former AFREZ properties for the month ending June 30, 2004.

     Depreciation expense. The increase is attributable to the acquisition of properties in the merger with AFREZ and the purchase of Arbor Hills in December of 2004. 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 2004.

     Interest expense. Interest expense represents interest paid and other expenses associated with the taxable and tax-exempt mortgage debt incurred to finance the Company’s investments in multifamily apartment properties. The increase in interest expense for the period is attributable to the debt assumed in the merger with AFREZ and the acquisition of Arbor Hills.

     General and administrative expenses. General and administrative expenses have increased by $1.8 million from the six months ended June 30, 2004. Salaries and benefit related costs accounted for $950,000 of the increase. This increase is primarily due to increased costs due to the internalization of the property management operations and severance payments of $400,000 and $345,000 respectively. General and administrative expenses are also impacted by increased Administrative fees paid to the Advisor of $350,000. Such fees increased due to the merger with AFREZ. The remainder of the increase is primarily attributable to increases in consulting fees, directors and officers insurance, and professional fees.

     Amortization expense. Amortization expense includes the amortization of in-place lease intangibles and debt financing costs. During 2005, there were five months of amortization of in-place lease intangibles related to the AFREZ merger and six months of amortization related to the Arbor Hills acquisition. There was one month of such amortization in 2004.

     Discontinued Operations. As of June 30, 2005, Park Trace Apartments and The Retreat Apartments have been designated as held for sale. Accordingly, the results of operations for the periods presented have been reclassified to discontinued operations and disclosed as a single line item on the Statements of Operations. The Glades Apartments, acquired in the AFREZ merger and divested in December 2004, is also classified as a discontinued operation.

Funds from Operations (“FFO”)

The following sets forth a reconciliation of the Company’s net loss as determined in accordance with GAAP and its FFO for the periods set forth (in thousands):

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

		For the Three Months Ended								For the Six Months Ended
		Ended June 30,								Ended June 30,
		2005				2004				2005				2004
Net loss		$	(507	)		$	(201	)		$	(1,488	)		$	(182	)
Depreciation expense			2,139				1,325				4,283				2,393
In-place lease amortization			907				352				2,166				352
Depreciation and amortization of discontinued operations			178				264				357				441
Funds from Operations		$	2,717			$	1,740			$	5,318			$	3,004
Shares outstanding			10,511				6,746				10,511				5,910
Funds from Operations per share		$	0.26			$	0.26			$	0.51			$	0.51

Funds from Operations increased $977,000, or 56%, and $2.3 million, or 77%, for the three and six months ended June 30, 2005, respectively. This is primarily due to the inclusion of the results of operations of the properties acquired in the merger with AFREZ and the purchase of Arbor Hills. These increases are partially offset by the increased general and administrative expenses and the inclusion of the $143,000 gain on sale of corporate equity securities during 2004.

FFO is calculated in accordance with the definition of FFO that is recommended by the National Association of Real Estate 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 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. Prior to 2005, 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 historically 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 which is calculated in accordance with GAAP.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

Supplemental Operating Performance Statistics

The following tables are presented to provide additional information regarding property performance.

		For the three months ended June 30,																For the six months ended June 30,
		2005								2004								2005								2004
		Physical				Economic				Physical				Economic				Physical				Economic				Physical				Economic
Property Name		Occupancy				Occupancy				Occupancy				Occupancy				Occupancy				Occupancy				Occupancy				Occupancy
Properties historically owned by the Company
Belvedere Apartments			99	%			94	%			96	%			90	%			99	%			95	%			97	%			90	%
Coral Point Apartments			94	%			81	%			87	%			63	%			93	%			79	%			86	%			67	%
Covey at Fox Valley			85	%			70	%			91	%			77	%			84	%			71	%			89	%			74	%
Greenbriar Apartments			92	%			84	%			95	%			80	%			93	%			84	%			93	%			81	%
The Hunt Apartments			93	%			90	%			93	%			91	%			95	%			92	%			91	%			89	%
Jackson Park Place Apartments			94	%			91	%			98	%			95	%			94	%			91	%			97	%			95	%
Littlestone of Village Green			94	%			80	%			91	%			78	%			94	%			80	%			93	%			81	%
Oakhurst Apartments			98	%			94	%			94	%			88	%			98	%			95	%			95	%			90	%
Oakwell Farms Apartments			95	%			79	%			95	%			76	%			94	%			77	%			93	%			73	%
Park at Countryside			98	%			93	%			96	%			91	%			99	%			93	%			93	%			88	%
The Park at 58 Apartments			76	%			72	%			84	%			77	%			78	%			74	%			81	%			75	%
Park Trace Apartments			97	%			72	%			93	%			72	%			96	%			72	%			94	%			74	%
The Retreat			92	%			69	%			95	%			69	%			90	%			67	%			95	%			68	%
St. Andrews at Westwood Apts			99	%			88	%			98	%			82	%			99	%			88	%			97	%			82	%
Shelby Heights			96	%			92	%			96	%			92	%			95	%			92	%			96	%			94	%
Properties acquired in the merger with AFREZ (1)
Bluff Ridge Apartments			98	%			94	%			99	%			97	%			98	%			95	%			99	%			97	%
Brentwood Oaks Apartments			97	%			89	%			98	%			87	%			97	%			88	%			98	%			87	%
Delta Crossing			97	%			69	%			95	%			68	%			97	%			69	%			93	%			67	%
Elliot’s Crossing Apartments			95	%			74	%			92	%			76	%			94	%			75	%			78	%			76	%
Fox Hollow Apartments			84	%			72	%			91	%			80	%			83	%			73	%			93	%			84	%
Highland Park Apartments			97	%			84	%			92	%			81	%			97	%			84	%			89	%			80	%
Huntsview Apartments			91	%			79	%			88	%			74	%			90	%			78	%			87	%			74	%
Lakes of Northdale Apartments			96	%			88	%			96	%			85	%			93	%			86	%			94	%			83	%
Misty Springs Apartments			100	%			94	%			98	%			91	%			100	%			94	%			99	%			92	%
Monticello Apartments			91	%			81	%			93	%			87	%			92	%			84	%			95	%			88	%
The Ponds at Georgetown			88	%			78	%			84	%			76	%			89	%			77	%			88	%			80	%
Waterman’s Crossing			98	%			94	%			98	%			91	%			96	%			92	%			98	%			92	%
Waters Edge Apartments			85	%			75	%			94	%			79	%			89	%			75	%			89	%			77	%
Recently acquired properties
Arbor Hills (2)			91	%			79	%			n/a				n/a				88	%			79	%			n/a				n/a
			94	%			82	%			94	%			81	%			93	%			82	%			93	%			81	%

 

(1) Properties were acquired by the Company on June 3, 2004. The above percentages include physical economic occupancy information for the two and five months prior to the Company’s ownership.

(2) Arbor Hills was acquired by the Company in December 2004.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

		Annualized Revenue per unit
		Three months ended June 30												Six months ended June 30
Property Name		2005								2004				2005				2004
Properties historically owned by the Company
Belvedere Apartments		$	9,809							$	9,043			$	9,719			$	9,130
Coral Point			6,330								5,281				6,234				5,174
Covey at Fox Valley			8,938								9,377				8,840				9,042
Greenbriar Apartments			5,934								5,514				5,871				5,443
The Hunt Apartments			5,765								5,782				5,928				5,657
Jackson Park Place			8,249								8,214				8,295				8,127
Littlestone of Village Green			6,988								6,854				7,101				7,044
Oakhurst Apartments			7,993								7,370				7,857				7,339
Oakwell Farms Apartments			6,632								6,337				6,510				6,185
Park at Countryside			8,023								7,449				7,998				7,177
The Park at Fifty Eight			4,963								5,323				5,032				5,106
Park Trace Apartments			7,180								7,199				7,115				7,234
The Retreat			6,380								6,375				6,254				6,304
St. Andrews at Westwood Apts			8,660								8,020				8,590				7,922
Shelby Heights			6,584								6,491				6,480				6,513
Properties acquired in the merger with AFREZ (1)
Bluff Ridge Apartments			7,918								7,590				7,953				7,625
Brentwood Oaks Apartments			8,041								7,808				7,908				7,799
Delta Crossing			6,956								6,653				6,747				6,544
Elliot’s Crossing Apartments			6,306								6,198				6,368				6,240
Fox Hollow Apartments			5,843								6,392				5,906				6,571
Highland Park Apartments			6,468								6,419				6,467				6,242
Huntsview Apartments			6,572								6,103				6,445				6,080
Lakes of Northdale Apartments			8,350								7,814				8,119				7,675
Misty Springs Apartments			7,933								7,495				7,844				7,516
Monticello Apartments			9,800								10,090				9,865				10,204
The Ponds at Georgetown			10,674								10,268				10,772				10,840
Waterman’s Crossing			9,962								9,599				9,762				9,567
Waters Edge Apartments			8,704								9,628				8,982				8,933
Recently acquired properties
Arbor Hills (2)			6,716								n/a				6,662				n/a
		$	7,387							$	7,228			$	7,337			$	7,125

(1)    Properties were acquired by the Company on June 3, 2004. The above amounts include operating revenues for the two and five months prior to the Company’s ownership.

(2)  Arbor Hills was acquired by the Company in December 2004.

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 the 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; (ii) to pay the operating expenses of the Company’s administration, including the fees paid to its Advisor; (iii)

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

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 maintain the necessary level of capital improvements and 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’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. In June 2004, the Company filed a 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 outstanding of approximately $166.5 million as of June 30, 2005. These mortgages consist of thirteen tax-exempt bonds with an aggregate principal balance outstanding of approximately $111.2 million and seven taxable mortgage notes payable with a combined principal balance of approximately $55.3 million. Eleven of these mortgage obligations, totaling approximately $72.9 million, require periodic payments of principal and interest while the remaining nine mortgage obligations require only periodic payments of interest. Approximately 69% of these mortgage obligations bear interest at a fixed rate with a weighted average interest rate of 5.8% for the three months ended June 30, 2005. The remaining 31% of these mortgage obligations bear interest at variable rates, via interest rate swap agreements, that had a weighted average interest rate of 2.8% for the three months ended June 30, 2005. Maturity dates on these mortgage obligations range from September 2005 to July 2031. Each of these mortgage loans has been made on a non-recourse basis, which means the lender’s source of payment in the event of default is limited to foreclosure of the underlying property securing the mortgage loan.

AMERICA FIRST APARTMENT INVESTORS, INC. AND SUBSIDIARIES

In order to mitigate interest rate risk associated with the Company’s variable rate debt, the Company has entered into the following derivative financial instruments.

		Interest Rate Swaps and Caps
				Counterparty								Company
				Notional				Receive/				Notional				Pay
		Maturity		Amount				Cap Rate				Amount				Rate
Fixed to Variable		December 6, 2006		$	4,800	(5)			7.00	%		$	4,800	(5)			3.29	% (3)
Fixed to Variable		December 6, 2006		$	5,300	(5)			7.13	%		$	5,300	(5)			3.29	% (3)
Fixed to Variable		December 6, 2006		$	5,129	(1) (5)			7.75	%		$	5,112	(1) (5)			3.29	% (3)
Fixed to Variable		January 22, 2009		$	8,300				5.38	%		$	8,300	(5)			3.29	% (3)
Variable to Fixed		February 3, 2009		$	8,100				2.64	% (2)		$	8,100				2.82	%
Variable to Fixed		June 25, 2009		$	10,910				2.64	% (2)		$	10,910				3.30	%
Fixed to Variable		July 13, 2009		$	6,930	(5)			7.25	%		$	6,930	(5)			3.29	% (3)
Fixed to Variable		July 13, 2009		$	3,980	(5)			7.50	%		$	3,980	(5)			3.29	% (3)
Interest Rate Cap		December 22, 2009		$	13,400				4.50	% (4)			N/A				N/A
Interest Rate Cap		December 22, 2009		$	12,750				4.50	% (4)			N/A				N/A
Variable to Fixed		January 15, 2012		$	11,320				3.44	%		$	11,320				2.64	% (2)