Interstate General: 10-Q for Quarter to 9/30/97 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997, OR / / 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 1-9393 Interstate General Company L.P. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 52-1488756 ------------------------------- -------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 222 Smallwood Village Center St. Charles, Maryland 20602 ---------------------------------------- (Address of Principal Executive Offices) (Zip Code) (301) 843-8600 ---------------------------------------------------- (Registrant's telephone number, including area code) Not Applicable ------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) 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 report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 10,331,785 Class A Units ------------------------ INTERSTATE GENERAL COMPANY L.P. FORM 10-Q INDEX PART I FINANCIAL INFORMATION Page Number Item 1. Consolidated Financial Statements ------ Consolidated Statements of Income (Loss) for the Nine Months Ended September 30, 1997 and 1996. (Unaudited) 3 Consolidated Statements of Loss for the Three Months Ended September 30, 1997 and 1996. (Unaudited) 4 Consolidated Balance Sheets at September 30, 1997 (Unaudited) and December 31, 1996. 5 Consolidated Statements of Cash Flow for the Nine Months Ended September 30, 1997 and 1996. (Unaudited) 7 Consolidated Statements of Cash Flow for the Three Months Ended September 30, 1997 and 1996. (Unaudited) 8 Notes to Consolidated Financial Statements. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations for the Nine and Three Months Ended September 30, 1997 and 1996. 19 PART II OTHER INFORMATION Item 1. Legal Proceedings 23 Item 2. Material Modifications of Rights of Registrant's 23 Securities Item 3. Defaults Upon Senior Securities 23 Item 4. Submission of Matters to a Vote of Security Holders 23 Item 5. Other Information 23 Item 6. Exhibits and Reports on Form 8-K 23 Signatures 24 INTERSTATE GENERAL COMPANY L.P. CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, (In thousands, except per unit amounts) (Unaudited) 1997 1996 ---------- ----------- REVENUES Community development - land sales to non-affiliates $ 4,529 $ 4,358 to affiliates 3,000 5,678 Homebuilding - home sales 5,510 8,002 Equity in earnings from partnerships, developer fees and gains from transfer of partnership interest 1,564 16,268 Investment in gaming properties 549 4 Rental property revenues 6,540 5,380 Management and other fees, substantially all from related entities 3,038 4,001 Interest and other income 640 750 ---------- ---------- Total revenues 25,370 44,441 ---------- ---------- EXPENSES Cost of land sales 4,873 7,538 Cost of home sales 5,457 7,540 Selling and marketing 906 1,015 General and administrative 5,079 5,960 Interest expense 2,683 4,037 Rental properties operating expense 2,784 2,379 Depreciation and amortization 1,582 1,204 Wetlands litigation expenses 68 750 Write-off of deferred project costs 6 329 ---------- ---------- Total expenses 23,438 30,752 ---------- ---------- INCOME BEFORE PROVISION FOR INCOME TAXES AND MINORITY INTEREST 1,932 13,689 PROVISION FOR INCOME TAXES 558 4,773 ---------- ---------- INCOME BEFORE MINORITY INTEREST 1,374 8,916 MINORITY INTEREST (129) (393) ---------- ---------- NET INCOME $ 1,245 $ 8,523 ========== ========== NET INCOME PER UNIT $ .12 $ .83 ========== ========== NET INCOME General Partners $ 12 $ 85 Limited Partners 1,233 8,438 ---------- ---------- $ 1,245 $ 8,523 ========== ========== WEIGHTED AVERAGE UNITS OUTSTANDING 10,274 10,257 ========== ========== The accompanying notes are an integral part of these consolidated statements. INTERSTATE GENERAL COMPANY L.P. CONSOLIDATED STATEMENTS OF LOSS FOR THE THREE MONTHS ENDED SEPTEMBER 30, (In thousands, except per unit amounts) (Unaudited) 1997 1996 ---------- ----------- REVENUES Community development - land sales to non-affiliates $ 1,910 $ 10 to affiliates -- -- Homebuilding - home sales 1,798 2,286 Equity in earnings from partnerships, developer fees and gains from transfer of partnership interest 305 509 Investment in gaming properties -- 4 Rental property revenues 2,240 2,139 Management and other fees, substantially all from related entities 769 731 Interest and other income 152 219 ---------- ---------- Total revenues 7,174 5,898 ---------- ---------- EXPENSES Cost of land sales 1,318 269 Cost of home sales 1,845 2,166 Selling and marketing 335 324 General and administrative 1,547 1,978 Interest expense 866 1,069 Rental properties operating expense 1,016 979 Depreciation and amortization 493 522 Wetlands litigation expenses -- 100 Write-off of deferred project costs -- 112 ---------- ---------- Total expenses 7,420 7,519 ---------- ---------- INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES AND MINORITY INTEREST (246) (1,621) PROVISION FOR INCOME TAXES 446 (670) ---------- ---------- INCOME (LOSS) BEFORE MINORITY INTEREST (692) (951) MINORITY INTEREST (116) 82 ---------- ---------- NET INCOME $ (808) $ (869) ========== ========== NET INCOME (LOSS) PER UNIT $ (.08) $ (.08) ========== ========== NET LOSS General Partners $ (8) $ (9) Limited Partners (800) (860) ---------- ---------- $ (808) $ (869) ========== ========== WEIGHTED AVERAGE UNITS OUTSTANDING 10,274 10,257 ========== ========== The accompanying notes are an integral part of these consolidated statements. INTERSTATE GENERAL COMPANY L.P. CONSOLIDATED BALANCE SHEETS (In thousands) A S S E T S September 30, December 31, 1997 1996 ------------- ----------- (Unaudited) (Audited) CASH AND CASH EQUIVALENTS Unrestricted $ 2,508 $ 2,212 Restricted cash 738 988 -------- -------- 3,246 3,200 ASSETS RELATED TO COMMUNITY DEVELOPMENT -------- -------- Land and development costs Puerto Rico 35,033 34,034 St. Charles, Maryland 27,267 26,980 Other United States locations 14,478 16,256 Notes receivable on lot sales and other, substantially all due from affiliates 7,153 5,815 -------- -------- 83,931 83,085 ASSETS RELATED TO INVESTMENT PROPERTIES -------- -------- Operating properties, net of accumulated depreciation of $21,467 and $20,658 as of September 30, 1997 and December 31, 1996, respectively 38,374 39,219 Investment in unconsolidated rental property partnerships 8,309 11,723 Other receivables, net of reserves of $34 and $121 as of September 30, 1997 and December 31, 1996, respectively 744 1,290 -------- -------- 47,427 52,232 -------- -------- ASSETS RELATED TO HOMEBUILDING Homebuilding construction and land 1,939 2,016 Investment in joint venture 454 275 Receivables and other 163 200 -------- -------- 2,556 2,491 OTHER ASSETS -------- -------- Goodwill, less accumulated amortization of $1,154 and $1,039 as of September 30, 1997 and December 31, 1996, respectively 1,881 1,995 Deferred costs regarding waste technology and other projects, receivables and other, net of reserves of $31 and $69 as of September 30, 1997 and December 31, 1996 9,169 4,336 Property, plant and equipment, less accumulated depreciation of $2,440 and $2,425 as of September 30, 1997 and December 31, 1996, respectively 1,136 1,229 -------- -------- 12,186 7,560 -------- -------- Total assets $149,346 $148,568 ======== ======== The accompanying notes are an integral part of these consolidated balance sheets. INTERSTATE GENERAL COMPANY L.P. CONSOLIDATED BALANCE SHEETS (In thousands) LIABILITIES AND PARTNERS' CAPITAL September 30, December 31, 1997 1996 ------------- ------------ (Unaudited) (Audited) LIABILITIES RELATED TO COMMUNITY DEVELOPMENT Recourse debt $ 38,055 $ 34,077 Non-recourse debt 2,302 2,153 Accounts payable, accrued liabilities and deferred income 5,051 4,829 -------- -------- 45,408 41,059 -------- -------- LIABILITIES RELATED TO INVESTMENT PROPERTIES Recourse debt 968 1,139 Non-recourse debt 39,206 39,508 Accounts payable and accrued liabilities 2,867 3,202 -------- -------- 43,041 43,849 -------- -------- LIABILITIES RELATED TO HOMEBUILDING Recourse debt 56 502 Accounts payable, accrued liabilities and deferred income 2,667 2,544 -------- -------- 2,723 3,046 -------- -------- OTHER LIABILITIES Accounts payable and accrued liabilities 3,434 4,078 Notes payable and capital leases 649 630 Accrued income tax liability - current 1,360 3,979 Accrued income tax liability - deferred 4,892 5,333 -------- -------- 10,335 14,020 -------- -------- Total liabilities 101,507 101,974 -------- -------- PARTNERS' CAPITAL General partners' capital 4,390 4,378 Limited partners' capital-10,257 Units issued and outstanding as of September 30, 1997 and December 31, 1996 43,449 42,216 -------- -------- Total partners' capital 47,839 46,594 -------- -------- Total liabilities and partners' capital $149,346 $148,568 ======== ======== The accompanying notes are an integral part of these consolidated balance sheets. INTERSTATE GENERAL COMPANY L.P. CONSOLIDATED STATEMENTS OF CASH FLOW FOR THE NINE MONTHS ENDED SEPTEMBER 30, (In thousands) (Unaudited) 1997 1996 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 1,245 $ 8,523 Adjustments to reconcile net income to net cash provided by (used by) operating activities: Depreciation and amortization 1,582 1,204 Provision for deferred income taxes (441) 311 Equity in earnings from gaming properties (549) (4) Equity in earnings from unconsolidated partnerships and developer fees (1,564) (16,268) Distributions from unconsolidated partnerships 5,142 15,603 Cost of sales-community development and homebuilding 10,330 15,078 Development and construction expenditures (9,761) (14,841) Equity in loss from homebuilding joint venture 66 48 Write-off of deferred project cost 6 329 Changes in notes and accounts receivable, due from affiliates changed $(363) and $(1,276) (755) (1,718) Changes in accounts payable, accrued liabilities and deferred income (2,704) 4,397 ------- ------- Net cash provided by operating activities 2,597 12,662 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Change in assets related to unconsolidated rental property partnerships (164) 101 Change in restricted cash 250 741 (Additions to) rental operating properties, net (396) (439) Payment of Fines (see Note 6) (3,212) -- (Acquisitions) of other assets, net (1,761) (456) Contributions to homebuilding joint venture (245) (90) ------- ------- Net cash (used in) investing activities (5,528) (143) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Cash proceeds from debt financing 19,332 13,243 Payment of debt (16,105) (25,948) Distributions to Unitholders -- (1,140) ------- ------- Net cash provided by (used in) financing activities 3,227 (13,845) ------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 296 (1,326) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,212 3,476 ------- ------- CASH AND CASH EQUIVALENTS, SEPTEMBER 30 $ 2,508 $ 2,150 ======= ======= The accompanying notes are an integral part of these consolidated statements. INTERSTATE GENERAL COMPANY L.P. CONSOLIDATED STATEMENTS OF CASH FLOW FOR THE THREE MONTHS ENDED SEPTEMBER 30, (In thousands) (Unaudited) 1997 1996 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ (808) $ (869) Adjustments to reconcile net income to net cash provided by (used by) operating activities: Depreciation and amortization 493 492 Provision for deferred income taxes 554 247 Equity in earnings from gaming properties -- (4) Equity in earnings from unconsolidated partnerships and developer fees (305) (510) Distributions from unconsolidated partnerships 175 758 Cost of sales-community development and homebuilding 3,163 2,515 Development and construction expenditures (2,997) (5,053) Equity in loss from homebuilding joint venture 18 29 Write-off of deferred project cost -- 112 Changes in notes and accounts receivable, due from affiliates changed $(46) and $642 (24) 640 Changes in accounts payable, accrued liabilities and deferred income (1,668) (317) ------- ------- Net cash (used in) operating activities (1,399) (1,960) ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Change in assets related to unconsolidated rental property partnerships 1 (459) Change in restricted cash 162 191 (Additions to) rental operating properties, net (46) 89 Payment of Fines (see Note 6) (2,962) -- (Acquisitions) of other assets, net (1,925) 24 Contributions to homebuilding joint venture (20) (6) ------- ------- Net cash (used in) investing activities (4,790) (161) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Cash proceeds from debt financing 16,011 1,880 Payment of debt (8,889) (2,016) Distributions to Unitholders -- (518) ------- ------- Net cash provided by (used in) financing activities 7,122 (654) ------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 933 (2,775) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,575 4,925 ------- ------- CASH AND CASH EQUIVALENTS, SEPTEMBER 30 $ 2,508 $ 2,150 ======= ======= The accompanying notes are an integral part of these consolidated statements. INTERSTATE GENERAL COMPANY L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1997 (Unaudited) (1) BASIS OF PRESENTATION AND PRINCIPLES OF ACCOUNTING The accompanying consolidated financial statements are unaudited but include all adjustments (consisting of normal recurring adjustments) which the Company's management considers necessary for a fair presentation of the results of operations for the interim periods. Certain account balances in the 1996 financial statements have been reclassified to conform to the 1997 presentation. The operating results for the nine months ended September 30, 1997 are not necessarily indicative of the results that may be expected for the year. Net income per Unit is calculated based on weighted average Units outstanding. Outstanding options, warrants to purchase Units and Unit Appreciation Rights do not have a material dilutive effect on the calculation of earnings per Unit and therefore are not presented. These unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in financial statements prepared in accordance with Generally Accepted Accounting Principles ("GAAP") have been condensed or omitted. While the Managing General Partner believes that the disclosures presented are adequate to make the information not misleading, it is suggested that these financial statements be read in conjunction with the financial statements and the notes included in the Partnership's Annual Report filed on Form 10-K for the year ended December 31, 1996. (2) FINANCING AND CASH MANAGEMENT MATTERS Because of the terms of its debt agreements, substantially all of the cash generated by the Company goes to pay down recourse debt and as a result, the Company's liquidity is restricted. In order to enhance its results of operations and cash flow, the Company has refinanced certain assets, negotiated additional financings, reduced expenses and developed a restructuring plan. In April 1997, the Company financed two substantially debt-free apartment projects owned by non-consolidated partnerships. These financings provided the Company approximately $5,000,000 which was utilized to meet debt obligations and other financial commitments. In September 1997, the Company closed a $20,000,000 loan that refinanced substantially all of the U.S. recourse bank debt. This loan provided funds for past due trade payables, future development and working capital. In addition, the release prices for land sales under the new loan are lower than under the loans that were refinanced, permitting the Company to retain larger portion of land sales proceeds to fund operating needs. The Company believes its ongoing operations, including asset sales and additional financings, will be sufficient to meet its existing debt and other operating obligations. The Company has development projects in various phases. Substantially all of the projects currently under construction have sufficient development loans in place to complete the construction. The Company intends to finance new construction with new development loans and working capital. (3) INVESTMENT IN UNCONSOLIDATED PARTNERSHIPS Housing Partnerships The following information summarizes financial data and principal activities of unconsolidated housing partnerships which the Company accounts for under the equity method. The information is presented to show the effect of the sale of four apartment projects and the elimination of four apartment projects that are currently included in the Company's consolidated financial statements (in thousands). Activity Prior to Activity Consolida- Prior to Comparable tion of Sale of Partnership Four Part- Four Part- Results nerships nerships Total ------------ --------- --------- ----- SUMMARY FINANCIAL POSITION: Total Assets September 30, 1997 $139,065 $-- $-- $139,065 December 31, 1996 141,107 -- -- 141,107 Total Non-Recourse Debt September 30, 1997 (a) 144,891 -- -- 144,891 December 31, 1996 136,468 -- -- 136,468 Total Other Liabilities September 30, 1997 24,358 -- -- 24,358 December 31, 1996 23,678 -- -- 23,678 Total Equity September 30, 1997 (a) (30,184) -- -- (30,184) December 31, 1996 (19,038) -- -- (19,038) Company's Investment September 30, 1997 (a) 7,711 -- -- 7,711 December 31, 1996 11,425 -- -- 11,425 SUMMARY OF OPERATIONS: Total Revenue Three Months Ended: September 30, 1997 (a) 7,940 -- -- 7,940 September 30, 1996 8,157 -- -- 8,157 Total Revenue Nine Months Ended: September 30, 1997 (a) 24,238 -- -- 24,238 September 30, 1996 24,442 1,018 1,103 26,563 Net Income (Loss) Three Months Ended: September 30, 1997 (a) (375) -- -- (375) September 30, 1996 553 -- -- 553 Net Income (Loss) Nine Months Ended: September 30, 1997 (a) (616) -- -- (616) September 30, 1996 567 135 109 811 Company's recognition of equity in earnings and developer fees Three Months Ended: September 30, 1997 (a) 305 -- -- 305 September 30, 1996 406 3 -- 409 Nine Months Ended: September 30, 1997 1,564 -- -- 1,564 September 30, 1996 1,359 270 -- 1,629 Activity Prior to Activity Consolida- Prior to Comparable tion of Sale of Partnership Four Part- Four Part- Results nerships nerships Total ------------ --------- --------- ----- SUMMARY OF OPERATING CASH FLOWS: Cash flows from operating activities Three Months Ended: September 30, 1997 1,185 -- -- 1,185 September 30, 1996 1,191 -- -- 1,191 Nine Months Ended: September 30, 1997 3,996 -- -- 3,996 September 30, 1996 4,934 220 387 5,541 Company's share of cash flows from operating activities Three Months Ended: Sepember 30, 1997 412 -- -- 412 September 30, 1996 498 -- -- 498 Nine Months Ended: September 30, 1997 1,586 -- -- 1,586 September 30, 1996 1,856 134 170 2,160 Operating cash distributions Three Months Ended: September 30, 1997 478 294 -- 772 September 30, 1996 491 236 -- 727 Nine Months Ended: September 30, 1997 (a) 10,627 523 -- 11,150 September 30, 1997 883 590 -- 1,473 Company's share of operating cash distributions Three Months Ended: September 30, 1997 179 -- -- 179 September 30, 1996 214 -- -- 214 Nine Months Ended: September 30, 1997 (a) 5,146 -- -- 514 September 30, 1996 367 154 -- 521 SUMMARY OF 1996 SALES TRANSACTION: Nine Months Ended September 30, 1996 Gain on Sale -- -- 39,934 39,934 Company's Equity and Earnings Recognition -- -- 14,639 14,639 Total Distribution of Sales Proceeds -- -- 36,118 36,235 Company's Share of Sales Proceeds Distribution -- -- 15,165 15,165 (a) Two substantially debt free complexes were refinanced to provide condominium conversion construction funds and distributions to their owners. The operating revenue, net income and cash flows are reduced while these units are under construction. The Company will receive 50% of the profits generated from the condominium sales and has guaranteed these loans, which cannot exceed $23,200,000. Comparable Partnership Results: The unconsolidated rental properties partnerships as of September 30, 1997 include 19 partnerships owning 4,563 rental units in 22 apartment complexes. The Company holds a general partner interest in these partnerships and generally shares in zero to 5% of profits, losses and cash flow from operations until such time as the limited partners have received cash distributions, equal to their capital contributions. Thereafter, IGC generally shares in 50% of cash distributions from operations. Lakeside Apartments was placed in service in 1996. The remaining complexes owned by Alturas Del Senorial Associates Limited Partnership, Bannister Associates Limited Partnership, Bayamon Gardens Associates Limited Partnership, Brookside Gardens, Carolina Associates Limited Partnership, Chastleton Apartments Associates, Coachman's Limited Partnership, Colinas de San Juan Associates Limited Partnership, Crossland Associates Limited Partnership, Essex Apartments Associates, Huntington Associates Limited Partnership, Jardines de Caparra Associates Limited Partnership, Monserrate Associates Limited Partnership, Monte de Oro Associates Limited Partnership, New Center Associates Limited Partnership, San Anton Associates Limited Partnership, Turabo Limited Dividend Partnership and Valle del Sol Limited Partnership were placed in service prior to 1995. Activity Prior to Consolidation of Four Partnerships: On April 1, 1996, the Company acquired a controlling interest in four partnerships owning 596 rental units, Wakefield Third Age L.P., Wakefield Terrace Associates L.P., Palmer Apartments L.P. and Headen House Associates L.P. Effective April 1, 1996, the results of operations and balance sheets of these partnerships are consolidated in the accompanying financial statements. Activity Prior to Sale of Four Partnerships: In March 1996, the Company completed the sale of four Puerto Rico apartment properties. The four properties, Las Americas I, Las Americas II, Las Lomas and Monacillos, totaling 918 units were purchased by non-profit organizations with financing provided by HUD through capital grants authorized by the Low Income Housing Preservation and Resident Homeownership Act ("LIHPRHA"). The Company retained the management contracts for these properties. Homebuilding Joint Venture The Company holds a 50% joint venture interest in Escorial Builders S.E. Escorial Builders was formed in 1995 to purchase lots from the Company and construct homes for resale. During 1996 and 1997, it purchased 98 and 118 lots, respectively. The profit on these lots are deferred until sold by Escorial Builders to a third party. The Company's share of the losses generated from the pre-sales activity and its investment are included with the Company's homebuilding operations in the accompanying financial statement. The table summarizes Escorial Builders' financial information (in thousands): Total Total Total Company's Assets Liabilities Equity Investment ------ ----------- ------ ---------- Summary of Financial Position: September 30, 1997 $12,854 $11,971 $883 $454 December 31, 1996 5,586 5,047 539 275 Total Net Company's Share Revenues (Loss) of Net (Loss) -------- ------ --------------- Summary of Operations: September 30, 1997 $ 2 $(136) $(68) September 30, 1996 -- (97) (48) Company's Share of -------------------------- Cash Flows Cash Flows From From Operating Operating Operating Cash Activities Activities Distributions ---------- ---------- ------------- Summary of Operating Cash Flows: September 30, 1997 $(7,642) $(3,821) $ -- September 30, 1996 (3,395) (1,698) -- (4) DEBT Debt The Company's outstanding debt is collateralized primarily by land, land improvements, homebuilding construction in process, receivables, investments in partnerships, and rental properties. The following table summarizes the indebtedness of IGC (in thousands): Outstanding Maturity Interest -------------------------- Dates Rates September 30, December 31, From/To From/To 1997 1996 -------- --------- ------------- ------------ Related to community development: Recourse debt Demand/ 9.0%/ $38,055 $34,077 07-31-04 P+2.5% Non-recourse debt 08-02-09 P+1.5% 2,302 2,153 Related to investment properties: Recourse debt Demand 7.35% 968 1,139 Non-recourse debt 10-01-19/ 6.85%/ 39,206 39,508 10-01-28 8.50% Related to homebuilding projects: Recourse debt Demand/ 9.0%/ 56 502 12-21-97 9.5% General: Recourse debt Demand/ 7.4%/ 649 630 02-01-01 12.00% ------- ------- Total debt $81,236 $78,009 ======= ======= *P = Prime lending interest rate. As of September 30, 1997, the $38,055,000 of recourse debt related to community development assets is fully collateralized by substantially all of the community development assets. Approximately $14,719,000 of this amount is further secured by investments in apartment rental partnerships. As of September 30, 1997, recourse investment property debt is secured by a letter of credit issued to the Company pursuant to the terms of a sales contract and the Company's share of excess cash flow distributions from two Puerto Rico apartment projects. The non-recourse investment properties debt is collateralized by apartment projects and secured by FHA or the Maryland Housing Fund. Mortgage notes payable of $7,276,000 have stated interest rates of 7.5% and 7.75%. After deducting interest payments provided by HUD, the effective interest rate over the life of the loan is 1%. The homebuilding debt is secured by the construction in progress of two homes. (5) RELATED PARTY TRANSACTIONS Certain officers, directors and a general partner, IBC, of the Company have ownership interests in various entities that conducted business with IGC during the last three years. IBC and these officers, and directors and their ownership or relationship with the entities engaged in business with IGC are reflected below: Partner, Officer or Director Ownership or Relationship - ------------------------- -------------------------------------------- IBC, general partner Partner of Chastleton Apartments Associates ("Chastleton"), Coachmans Limited Partnership ("Coachmans"), El Monte Properties S.E. ("El Monte"), G.L. Limited Partnership ("Rolling Hills"), Smallwood Village Associates ("SVA"), Smallwood Village Office Building Associates ("SVOBA"), Village Lake L.P. ("Village Lake"), Equus Gaming Company L.P. ("Equus"); owner of Equus Management Company ("EMC"), Darby Station Limited Partnership ("Darby Station"); member of Deer Valley Limited Liability Company ("Deer Valley") James J. Wilson ("JJW"), Shareholder of Wilson Securities Corporation, Chief Executive Officer ("WSC"); Officer and Director of CP Capitol and Chairman of the Board Corporation ("CP"), owned by WSC, holder of of IGC's managing general notes receivable that are secured by the partner existing general partners' interest in Capital Park James M. Wilson ("JMW"), Shareholder, Officer and Director of IBC, Chief Financial Officer and Advanced Power Systems, Inc. ("APS") and WSC, Director of IGC's managing Partner of SVOBA; Officer of CP; manager of general partner Deer Valley Thomas B. Wilson ("TBW"), Shareholder, Officer and Director of IBC, Director of IGC's managing APS and WSC; President and Chief Operating general partner Officer of El Comandante Operating Company ("ECOC"); manager of Deer Valley Jorge Colon-Nevares, Partner of Twenty First Century Homes S.E. Director of IGC's managing ("Twenty First Century"); owner of Compri general partner Caribe Development Corp. ("Compri") Management Services The management services provided to the related parties described above are summarized below (in thousands): REVENUE FOR THE NINE AND THREE MONTH PERIODS ENDED SEPTEMBER 30, --------------------------------------------------------- Three Nine Months Months ---------------------------------------------- ---------- Management Decrease Related Fees and (Increase) Total Total Party Interest in Reserve Recognized Recognized ------------- ---------- ---------- ---------- ---------- 1997: Chastleton (c) IBC $ 57 $ 18 $ 75 $ 1 Coachman's (c) IBC 20 8 28 -- Santa Maria WSC 52 -- 52 15 El Monte IBC 77 -- 77 26 Rolling Hills (c) IBC 69 29 98 -- Village Lake (c) IBC 19 10 29 1 Capital Park JJW, JMW 112 -- 112 38 ----- ----- ----- ----- $ 406 $ 65 $ 471 $ 81 ===== ===== ===== ===== 1996: Chastleton IBC $ 55 $327 $382 $ 1 Coachman's IBC 25 29 54 -- Santa Maria WSC 46 -- 46 5 El Monte IBC 74 -- 74 19 Rolling Hills IBC 67 -- 67 22 Village Lake IBC 18 (10) 8 -- Capital Park JJW, JMW 159 -- 159 30 SVA ---- 22 -- 22 1 SVOBA IBC, JMW, TBW 3 -- 3 -- IBC JMW, TBW 20 -- 20 -- ----- ----- ------ ----- $ 489 $ 346 $ 835 $ 78 ===== ===== ====== ===== OUTSTANDING RECEIVABLE AT (b) -------------------------------------------------------------- September 30, 1997 December 31, 1996 ------------------------------ ------------------------------ Receivable (a) Reserve Balance Receivable (a) Reserve Balance -------------- ------- ------- -------------- ------- ------- Chastleton (c) $ 58 $ (19) $ 39 $ 47 $ (36) $ 11 Coachman's (c) 8 (7) 1 26 (15) 11 Santa Maria 1 -- 1 46 -- 46 El Monte 8 -- 8 40 -- 40 Rolling Hills (c) 53 -- 53 65 (53) 12 Village Lake (c) 17 (6) 11 27 (16) 11 Capital Park 15 -- 15 23 -- 23 SVA 18 -- 18 2 -- 2 ------ ----- ------ ------ ----- ------ $ 178 $ (32) $ 146 $ 276 $(120) $ 156 ====== ===== ====== ====== ===== ====== (a) The outstanding receivable balances include unpaid management fees, operating advances, reimbursement due for common expenses, and interest on those balances. (b) The aggregate maximum outstanding balance due from these entities for management and related services at any one time during the first nine months of 1997 and during 1996 was $297,000 and $1,025,000, respectively. (c) During the second quarter of 1997, an affiliate of IBC purchased the management fees receivable due from Chastleton, Coachman's, Rolling Hills, and Village Lake for a cash payment of $190,000. The collection of these receivables had previously been questionable and they had been fully reserved. This transaction resulted in income recognition of $190,000. Office Space Rent IGC rents executive office space and other property from affiliates both in the United States and Puerto Rico pursuant to leases that expire through 2001. Rental expense, net of sublease income, for the nine months ended September, 1997 and 1996 was $246,000 and $268,000, respectively. In management's opinion, all leases with affiliated persons are on terms at least as favorable to IGC as that generally available from unaffiliated persons for comparable property. Land and Other Sales The outstanding balance of the two notes receivable for land sales to Compri as of September 30, 1997 and December 31, 1996 were $3,218,000 and $3,544,000, respectively. Certain offsite improvements were not completed as scheduled, prompting a renegotiation of the notes' terms. The Company agreed to postpone the commencement of interest on two of the notes until this work is completed or Compri begins construction. During the second quarter of 1997, the Company established an additional $263,000 discount on these notes. In the first six months of 1997, IGC collected the note receivable balance for land sales to Darby Station that had an outstanding balance of $1,200,000 at December 31, 1996. On June 30, 1997, the Company sold 374 acres to Deer Valley for $3,000,000 and recognized profit of $1,311,000. As payment for this parcel, the Company received a 20% downpayment and the purchaser assumed a note payable for the balance. Operations Distributed to Unitholders The Company's 99% limited partnership interest in Equus was distributed to its unitholders in February 1995 (the "Equus Distribution"). Since that time through April 1996, the Company continued to manage and provided certain reimbursable administrative services and support to Equus. The outstanding receivable balance for these services provided Equus Gaming Company L.P. pursuant to a Master Support and Service Agreement as of September 30, 1997 and December 31, 1996 were $0 and $416,000, respectively. Pursuant to the Transfer Control Agreement effective December 31, 1996 (the "Transfer Agreement"), IGC transferred its remaining interests in and control over EMC, Equus and Housing Development Associates ("HDA") to IBC. This included the transfer to IBC of the Company's general partner interest in Equus, an obligation subject to the approval of Nasdaq Stock Market. In addition, the Transfer Agreement calls for IGC to issue 75,000 IGC Units to Equus to satisfy the outstanding employee option and incentive rights to the employees that were transferred to EMC. As a result of this transaction and payment of the amounts due IGC, the Company recognized earnings equal to the $549,000 negative basis of its investment in Equus and issued the 75,000 Units. Other As of September 30, 1997 and December 31, 1996, IGC owed IBC $14,000 and $54,000 of unpaid minority interest distributions. During the first nine months of 1997, IGC paid APS the $54,000 collected on a receivable that was previously sold to APS. As of September 30, 1997 and December 31, 1996, the outstanding balance due from IBC related to the pass through of taxable gains was $681,000 and $881,000, respectively. In 1994, the Company acquired HDA's minority partner interest. As a result of this transaction, the Company obtained a note receivable, including accrued interest, due from ECOC. At September 30, 1997 and December 31, 1996, the outstanding balance due from ECOC was $290,000 and $277,000, respectively. During the second quarter of 1997, IGC sold to IBC its 49% limited partner interest and 90% of its 1% general partner interest in Coachman's. This transaction resulted in income recognition of $576,000. During the third quarter of 1997, IBC was substituted as the guarantor of a $4,569,000 letter of credit issued on behalf of Chastleton Apartments Associates L.P. This letter of credit is collateralized by certain assets owned by IBC, IBC affiliates and the Company. The Company's assets included in the collateral consist of rights to distributions from three Puerto Rico housing partnerships and a $4,636,000 note receivable from Brandywine Investment Associates Limited Partnership. On November 11, 1997, the Board of Directors approved the formation of a trust for the purpose of holding Caribe Waste Technologies, Inc. ("CWT") shares separate from IGC control and from the possibility of the CWT shares being returned to IGC. The trust is intended to be a grantor trust so that it will not be taxed as a separate entity but will be treated as a pass- through entity with profits and losses flowing through IGC to its Unitholders. Two IGMC directors and one IGC officer serve as Trustees. As of September 30, 1997 and December 31, 1996, IGC had invested $1,161,000 and $869,000 in CWT's operations. (6) STATUS OF FINES Pending the decision of the Court of Appeals on the wetlands violations conviction, the Company complied with the lower court's decision and paid the $3,000,000 fine plus accrued interest totalling $3,212,000. This amount is included in Other Assets in the accompanying financial statements. If the wetlands conviction is overturned, IGC would receive a full refund of the $3,000,000 in fines, and any conservation easements encumbering the Wetlands Properties would be removed. Appeals were filed with the U.S. Court of Appeals for the Fourth Circuit ("Appeals Court"), and Mr. Wilson's prison sentence was stayed pending the outcome of the appeals. The Appeals Court heard the oral arguments on March 3, 1997, and a ruling is expected during the fourth quarter of 1997. Management believes that IGC, SCA and Mr. Wilson have numerous and legitimate grounds for the appeal. The appeal may result in the conviction being upheld, overturned or remanded to the District Court for retrial. In the event that the criminal conviction is overturned as a result of the appeal, the U.S. Department of Justice may appeal such decision of the Appeals Court to the United States Supreme Court. In addition, the U.S. Attorney may refile at any time the civil action relating to the Wetlands Properties that was dismissed without prejudice by the District Court. Any determination in a civil action adverse to IGC may result in the imposition of fines and substantial remediation costs on IGC. On October 23, 1997, the District Court denied a motion by IGC and SCA to stay, pending resolution of IGC's and SCA's appeal, the restoration and mitigation obligations with respect to the Towne Center South land and an additional parcel. IGC and SCA have appealed this decision to the Appeals Court. (7) COMPANY RESTRUCTURING Management, together with its advisors, is continuing to develop the restructuring plan described in the Registrant's 1996 Form 10-K. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITIONS For the Nine Months Ended September 30, 1997 and 1996 General: Historically, the Company's financial results have been significantly affected by the cyclical nature of the real estate industry. Accordingly, the Company's historical financial statements may not be indicative of future results. For further information about certain factors which may affect future income and cash flow, see "Additional Prospective Information" below. Community Development Operations: Community development land sales revenue decreased 25% to $7,529,000 during the nine months ended September 30, 1997, as compared to $10,036,000 during the nine months ended September 30, 1996. The decrease is attributed to a decrease in residential lot sales in Puerto Rico. Since these lots are sold to homebuilders in bulk, there are fewer sales transactions. The timing of these sales causes fluctuations when comparing quarterly results. In addition, the U.S. residential lot sales volume has continued to be unfavorably impacted by the competitive market conditions and the delay of new development in the next village, Fairway. The gross profit margin during the first nine months ended September 30, 1997, increased to 35% as compared to 25% in the same period of 1996. This increase is due primarily to the sales mix. During the 1996 period, 11% of the sales were lots sold at book value, as the Company continued its efforts to reduce its inventory in saturated market areas, and none of the sales were U.S. commercial parcels. During the comparable 1997 period, there were no lot sales at book value and 26% of the sales were commercial parcels. The U.S. commercial sales historically have produced the highest gross profits due to their high sales prices and relatively low development costs. In addition, during the 1997 period, 41% of the sales revenue, or $3,070,000, was generated by undeveloped bulk parcels with low acquisition costs that resulted in an average gross profit margin of 44%. Homebuilding Operations: Revenues from home sales decreased 31% to $5,510,000, during the nine months ended September 30, 1997, from $8,002,000 during the nine months ended September 30, 1996. The number of homes sold decreased 32%, to 52 sales as compared to 76 sales in the first nine months ended September 30, 1996. These reductions were primarily due to the phase out of the tract homebuilding operations and increased competition in the homebuilding market. The gross profit margins decreased to 1% during the nine months ended September 30, 1997, as compared to 6% during the same period in 1996. During the nine months ended September 30, 1997, the Company closed seven homes that incurred additional costs to cure non-reoccurring construction problems. Rental Property Revenues and Operating Results: Rental properties revenues, net of operating expenses, increased 25% to $3,756,000 during the nine months ended September 30, 1997, as compared to $3,001,000 during the same period in 1996. Rental property revenues and operating expenses include the results of operations of the three consolidated apartment projects for the first three months of 1996 and seven partnerships for the second and third quarter of 1996 and the first, second and third quarter of 1997. The additional four partnerships became majority-owned in April 1996 through acquisitions of additional limited partnership units. Equity in Earnings from Partnerships and Developers Fees: Equity in earnings decreased $14,704,000 to $1,564,000 during the nine months ended September 30, 1997, from $16,268,000 during the nine months ended September 30, 1996. This decrease was primarily due to the $14,639,000 earned on the LIHPRHA sale during the 1996 period and the elimination of the equity in earnings in the four partnerships consolidated during the 1997 period. Management and Other Fees: Management and other fees decreased 24% to $3,038,000 in the first nine months ending September 30, 1997, as compared to $4,001,000 in the first nine months ending September 30, 1997. This decrease was due primarily to special management fees of $1,362,000 earned in the first quarter of 1996 from the LIHPRHA transaction, offset in part by $619,000 earned from the refinancing of two apartment complexes in the first nine months of 1997. Interest Expense: Interest expense decreased $1,354,000 to $2,683,000 during the nine months ended September 30, 1997, as compared to $4,037,000 during the same period in 1996. This decrease is primarily attributable to the $500,000 in loan fees incurred during the first nine months of 1996 and a decrease in the average outstanding debt. General and Administrative Expense: General and administrative expenses decreased $881,000 to $5,079,000 in the nine months ended September 30, 1997, from $5,960,000 in the same period in 1996, as a result of management's continued focus on cost efficiency. Specifically, management experienced reductions in legal fees of $171,000 and salaries and benefits of $961,000. These reductions in spending were offset by approximately $263,000 in bad debt expense in the nine months ended September 30, 1997 as a discount on the Compri notes. The notes were renegotiated as discussed in Note 5. For the Three Months Ended September 30, 1997 and 1996 Community Development Operations: Community development land sales revenue increased to $1,910,000 during the three months ended September 30, 1997, from $10,000, during the three months ended September 30, 1996. This increase is primarily due to a commercial sale in Puerto Rico for $1,500,000. The gross profit margin during the three month period ended September 30, 1997 increased to 31%, $592,000, as compared to $(259,000) in the same period of 1996. This increase is due primarily to the 39% gross margin earned from the third quarter 1997 commercial sale compared to a sales volume during the third quarter of 1996 that was less than the period costs incurred during that quarter. Homebuilding Operations: Revenues from home sales decreased 21% to $1,798,000 during the three months ended September 30, 1997, as compared to $2,286,000 during the three months ended September 30, 1996. The number of homes sold decreased 24%, to 16 from 21 in the three months ended September 30, 1996. These reductions were primarily due to the phase out of the tract homebuilding operations. The gross profit margins decreased to (3)%, or $(47,000) during the three months ended September 30, 1997, as compared to 5% or $120,000 during the same period in 1996. This decrease was primarily attributable to a 24% decrease in sales volume as discussed above and only a 10% decrease in overhead. Rental Property Revenues and Operating Results: Rental properties revenues, net of operating expenses, increased 6% to $1,224,000 during the three months ended September 30, 1997, as compared to $1,160,000 during the same period in 1996. The increase can be attributed to reduced vacancies during the 1997 period. Equity in Earnings from Partnerships and Developers Fees: Equity in earnings decreased $204,000 to $305,000 during the three months ended September 30, 1997, from $509,000 during the three months ended September 30, 1996. This decrease can be attributed to the reduction of equity earned from the two properties in the process of being converted to condominiums. Management and Other Fees: Management and other fees increased 5%, to $769,000, in the three month period ending September 30, 1997, as compared to $731,000 in the three month period ending September 30, 1996. This increase was due primarily to the special management fees earned from the supervision of the condominium conversion during the 1997 period. Interest Expense: Interest expense decreased $203,000 to $866,000 during the three months ended September 30, 1997, as compared to $1,069,000 during the same period in 1996. This decrease is primarily attributable to the reduced average outstanding loan balances during the third quarter of 1997 as compared to the same quarter in 1996. General and Administrative Expense: General and administrative expenses decreased by $431,000 to $1,547,000 in the three months ended September 30, 1997, from $1,978,000 in the same period in 1996. This decrease was due primarily to reduction in salaries and benefits of $327,000 and as a result of management's continued focus on cost efficiency. Liquidity and Capital Resources See Note 2 on page 9 of this Form 10-Q. Additional Prospective Information The following discussion contains statements that may be considered forward looking that involve a number of risks and uncertainties as discussed herein and in the Company's SEC reports. Therefore, actual results could differ materially. The housing markets in St. Mary's and Charles County are anticipated to be favorably impacted by the expansion of the Patuxent River Naval Air Warfare Center in St. Mary's County. This expansion will create 13,000 jobs within the next few years. In addition, Management is negotiating certain commercial sales contracts it hopes to finalize before the end of 1997 that will result in 1998 closings. Traditionally, the Company has realized the value of its land assets by selling parcels in fee simple transactions, by taking back notes or through option agreements on residential lots in which lot prices escalate at predetermined rates. On occasion, it also has participated in joint ventures by contributing land at its appraised value in exchange for a combination of cash at settlement and/or a percentage of the partnership's cash flow. The joint ventures may develop land for sale or lease. As a result of its restructuring as disclosed in its latest Form 10-K, the Company may find joint ventures as the best strategy to maximize long-term returns, especially on its commercial land. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On October 23, 1997, the U.S. District Court for the District of Maryland denied the Company's motion for partial stay of sentence pending appeal. The Company sought to stay the Court's requirement to remediate portions of Towne Center South and Parcel L. The Company has filed a notice of appeal to the U.S. Court of Appeals for the Fourth Circuit seeking to reverse the lower Court ruling. ITEM 2. MATERIAL MODIFICATIONS OF RIGHTS OF REGISTRANT'S SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits required by Securities and Exchange Commission Section 601 of Regulation S-K. Exhibit No. Description of Exhibit Reference - ------- ----------------------------------------- ---------------------- 10(a) Master Loan Agreement dated as of Filed herewith August 1, 1997 by and among Interstate General Company L.P. and American Community Properties Trust, St. Charles Community, LLC and Banc One Capital Partners IV, Ltd. (b) None. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INTERSTATE GENERAL COMPANY L.P. ------------------------------- (Registrant) By: Interstate General Management Corporation Managing General Partner Dated: November 14, 1997 By: /s/ James J. Wilson ----------------- ----------------------------- James J. Wilson Chairman and Chief Executive Officer Dated: November 14, 1997 By: /s/ J. Michael Wilson ----------------- ----------------------------- J. Michael Wilson Vice Chairman, Chief Financial Officer and Director Dated: November 14, 1997 By: /s/ Cynthia L. Hedrick ----------------- ----------------------------- Cynthia L. Hedrick Vice President and Controller INDEX TO EXHIBITS EXHIBIT NUMBER EXHIBIT - ------- ------- 10(a) Master Loan Agreement dated as of August 1, 1997 by and among Interstate General Company L.P. and American Community Properties Trust, St. Charles Community, LLC and Banc One Capital Partners IV, Ltd. Exhibit 10(a) MASTER LOAN AGREEMENT dated as of August 1, 1997 by and among INTERSTATE GENERAL COMPANY, L.P. and AMERICAN COMMUNITY PROPERTIES TRUST, ST. CHARLES COMMUNITY, LLC and BANC ONE CAPITAL PARTNERS IV, LTD TABLE OF CONTENTS PAGE SECTION 1. Definitions 1 1.1. ACPT 1 1.2. Additional Interest Rate 1 1.3. Additional Interest 1 1.4. Architect 1 1.5. Bank One 1 1.6. Bank One Prime Rate 1 1.7. Base Interest 1 1.8. Base Rate 1 1.9. Basis Point 2 1.10. Borrower 2 1.11. Business Day 2 1.12. Closing Date 2 1.13. Collateral 2 1.14. Construction Contracts 2 1.15. Contracts 2 1.16. Contract Assignment 2 1.17. Deed of Trust 2 1.18. Deed of Trust Property 2 1.19. Default 2 1.20. Default Period 2 1.21. Default Rate 2 1.22. Deposit Pledge Agreement 2 1.23. Development Budget 3 1.24. Development Completion Date 3 1.25. Development Escrow Account 3 1.26. Development Period 3 1.27. Enforcement Costs 3 1.28. Event of Default 3 1.29. Fairway Village I Loan Advances 3 1.30. Fairway Village Property 3 1.31. Fairway Village I Project 3 1.32. Financing Documents 3 1.33. Force Majeure 3 1.34. GAAP 3 1.35. General Contractor 3 1.36. Governmental Authority 4 1.37. Guarantee 4 1.38. Guarantor and Guarantors 4 1.39. IGC 4 1.40. IGP 4 1.41. Improvements 4 1.42. Indebtedness 4 1.43. Interest 5 1.44. Interest Period 5 1.45. Key Principals 5 1.46. Key Principals' Guaranty 5 1.47. Land Records 5 1.48. Late Charge 5 1.49. Lien 5 1.50. Loan 6 1.51. Loan Advance and Loan Advances 6 1.52. Lot or Lots 6 1.53. Mirror Note 6 1.54. NationsBank 6 1.55. Note 6 1.56. Obligations 6 1.57. Option Agreement 6 1.58. Pending Litigation 6 1.59. Person or person 6 1.60. Plans and Specifications 6 1.61. Plan of Remediation 6 1.62. Principal Amount 7 1.63. Principal Payment Date 7 1.64. Project 7 1.66. Property Owner 7 1.67. Property Owner Guaranty 7 1.68. Release Payment 7 1.69. Release Payment Proceeds Account 7 1.70. Remediation Costs 7 1.71. Remediation Reserve Account 7 1.72. Requisitions 7 1.73. Scheduled Maturity Date 7 1.74. Structuring Fee 7 1.75. Subcontracts 7 1.76. Subsequent Advance 7 1.77. Title Company 7 1.78. Title Insurance Policy 8 1.79. Trustee 8 1.80. Wilson Guaranty 8 SECTION 2. The Loan 8 2.1. The Loan Facility 8 2.2. Payoff of NationsBank, Reimbursement and Accounts Payable 9 2.2.1. Payoff of NationsBank 9 2.2.2. Reimbursement to IGP 9 2.2.3. Payment of Accounts Payable 9 2.3. Establishment of Remediation Reserves and Payment of Fine 10 2.3.1. Pending Litigation 10 2.3.2. Remediation Reserves 10 2.3.3. Payment of Fine 11 2.4. Infrastructure Development 11 2.4.1. Development of Fairway Village I Project 11 2.4.2. Loan Proceeds for Fairway Village I 11 2.4.3. Fairway Village I Loan Advances 12 2.4.4. Development and Completion of the Fairway Village I Project 14 2.4.5. Additional Funds 14 2.4.6. Assignments 14 2.4.7. Assignment of Construction Contracts, Plans and Specifications 14 2.4.8. No Warranty by the Lender 15 2.4.9. Establishment of Development Escrow Account 15 2.4.9.1 Development Escrow Account 15 2.4.9.2 Use of Funds 15 2.4.9.3 Disbursements 15 2.4.9.4 Costs 16 2.5. Repayment of the Loan 16 2.5.1. Principal Payment of the Loan 16 2.5.2. Loan Interest 16 2.5.3. Loan Default Rate 16 2.5.4. Loan Interest Payments 17 2.5.5. The Note and the Mirror Note 17 2.5.6. Undisbursed Loan Proceeds 17 2.5.7. Loan Payments 17 2.5.8. Interest Calculation 18 2.5.9. Late Charges 18 2.5.10. Prepayment of Loan 18 2.6. Guaranties, Collateral, etc. 18 2.6.1. Guaranties 18 2.6.1.1. Property Owner Guaranty 18 2.6.1.2. Key Principal Guaranty 19 2.6.1.3. Wilson Guaranty 19 SECTION 3. Conditions Precedent 21 3.1. Conditions Precedent to the Initial Loan Advance 21 3.1.1. Organizational Documents 21 3.1.1.1. IGC 21 3.1.1.2. ACPT 21 3.1.1.3. Property Owner 21 3.1.2. Financial Statements 22 3.1.3. UCC, Judgment and Lien Searches 22 3.1.4. Architect and Plans and Specifications 22 3.1.5. General Contractor 22 3.1.6. Title Insurance 22 3.1.7. Property and Casualty Insurance 23 3.1.8. Flood Insurance 23 3.1.9. Survey 23 3.1.10. Environmental Audit 23 3.1.11. Appraisal 23 3.1.12. Development Budget, etc. 23 3.1.13. Commencement of Work 23 3.1.14. Leases 24 3.1.15. Opinion of Counsel to the Borrower, Property Owner and the Guarantors 24 3.1.16. Taxes 24 3.1.17. Other Items 24 3.2. Conditions to the Making of all Fairway Village I Loan Advances, and Remediation Loan Advances 24 3.2.1. Requisition 24 3.2.2. Time for Completion of Development 24 3.2.3. Waivers of Liens 24 3.2.4. Title Continuation 25 3.2.5. Conformity with Plans and Specifications or Remediation Plan 25 3.2.6. Site Plan, Public Works Agreements 25 3.2.7. Permits, etc. 25 3.2.8. Utilities 25 3.3. Conditions to Making All Loan Advances 26 3.3.1. Representations and Warranties 26 3.3.2. Legality 26 3.3.3. Order, etc. 26 3.3.4. No Litigation 26 3.3.5. Compliance 26 3.3.6. Default 27 SECTION 4. Representations and Warranties 27 4.1. Authority, etc. 27 4.1.1. IGC 27 4.1.2. ACPT 27 4.1.3. Property Owner 28 4.2. Litigation 28 4.3. Taxes 28 4.4. Title to Property and Collateral 28 4.5. Compliance with Laws, etc. 29 4.5.1. Environmental Laws 29 4.5.2. Hazardous Materials 29 4.6. Material Agreements 29 4.7. Approvals and Consents 29 4.8. Permits,etc. 30 4.9. Construction Contracts 30 4.10. Plans and Specifications 30 4.11. Compliance in Zoning 30 4.12. Utilities 31 4.13. Access; Roads 31 4.14. Violations 31 4.15. Liens 31 4.16. Accuracy of Information 31 SECTION 5. Affirmative Covenants 32 5.1. Payment of Obligations 32 5.2. Financial Statements and Other Reports 32 5.3. Gross Revenues from Sale of Property 32 5.4. Conduct of Business and Maintenance of Existence 22 5.5. Compliance with Laws, etc. 33 5.6. Payment of Liabilities and Taxes 33 5.7. Contractual Obligations 33 5.8. Maintenance of Property 33 5.9. Insurance 33 5.10. Inspection 34 5.11. Development 34 5.12. Payment to General Contractor 34 5.13. Development Progress Report 35 5.14. Inspections; Cooperation 35 5.15. Vouchers and Receipts 35 5.16. Correction of Defects 36 5.17. Notice of Liens 36 5.18. Releases 36 5.19. Compliance with Contracts 36 5.20. Notice 36 5.21. Payment of Release Amount 36 5.22. Resolution of Pending Litigation 37 5.23. Investment Banking Services 37 5.24. Review of Operations 37 5.25. Debt to Worth Ratio 37 SECTION 6. Negative Covenants 37 6.1. Indebtedness 38 6.2. Liens 38 6.3. Loans and Investments 38 6.4. Mergers, Acquisitions, Restructuring, etc. 38 6.5. Sale of Assets and Liquidation 38 6.6. Change of Business 38 6.7. Lease 39 6.8. Prohibited Distributions 39 SECTION 7. Partial Releases 39 7.1. Sale of Lots 39 7.2. Contract Approval 39 7.3. Subdivision Approval 39 7.4. Additional Conditions to Release 39 7.4.1. Release Payment 39 7.4.2. Remaining Property 40 7.4.3. Notice; Frequency 40 7.4.4. Default 40 7.4.5. Release Payment Proceeds 40 SECTION 8. Events of Default 41 8.1. Payment of Obligations 41 8.2. Perform, etc. Other Provisions of This Agreement and other Financing Documents 41 8.3. Representations and Warranties 42 8.4. Progress of Development 42 8.5. Completion of Development 42 8.6. Default Under Construction Contracts 42 8.7. Mechanic's Lien 42 8.8. Liquidation, Termination, Dissolution, etc. 42 8.9. Bankruptcy 42 8.10. Receiver, etc. 43 8.11. Payment of Any Other Indebtedness 43 8.12. Material Adverse Change 43 SECTION 9. Rights and Remedies 43 9.1. Rights and Remedies 43 9.2. Liens, Setoff 45 9.3. Enforcement Costs 45 9.4. Application of Proceeds 46 9.5. Remedies, etc. Cumulative 46 9.6. No Waiver, etc. 46 SECTION 10. Restructuring of IGC 47 10.1. Continuation of Lien 47 10.2. Structure of REIT 47 10.3. Opinions of Counsel 47 10.4. Confirmation of Security Interests 47 10.5. Release of IGC from Covenants 47 SECTION 11. Miscellaneous 47 11.1. Course of Dealing; Amendment 47 11.2. Waiver of Default 48 11.3. Notices 48 11.4. Right to Perform 49 11.5. Costs and Expenses 49 11.6. Consent to Jurisdiction 49 11.7. Waiver of Jury Trial 50 11.8. Survival 50 11.9. Binding Effect 50 11.10. Applicable Law and Time of Essence 50 11.11. Duplicate Originals and Counterparts 50 11.12. Headings 50 11.13. Severability 50 11.14. Conflicts 51 MASTER LOAN AGREEMENT THIS MASTER LOAN AGREEMENT (this "Agreement") is made this 1st day of August, 1997, by and among INTERSTATE GENERAL COMPANY, L.P., a Delaware limited partnership ("IGC") and AMERICAN COMMUNITY PROPERTIES TRUST, a Maryland real estate investment trust ("ACPT") (IGC and ACPT are collectively herein, the "Borrower"), ST. CHARLES COMMUNITY, LLC, a Delaware limited liability company ("Property Owner") and BANC ONE CAPITAL PARTNERS IV, LTD., an Ohio limited liability company (the "Lender"); Witnesseth: RECITALS WHEREAS, subject to and upon the terms, conditions and provisions of this Agreement, Borrower may obtain a loan from the Lender, and reloan a portion of the proceeds to Property Owner. NOW, THEREFORE, the parties hereto agree as follows: SECTION 1. Definitions. As used herein, the terms defined throughout this Agreement shall have the respective meanings specified therein and the following terms shall have the following meanings: 1.1. "ACPT" means American Community Properties Trust, a Maryland real estate investment trust. 1.2. "Additional Interest Rate" means the additional rate of interest as set forth in the Note. 1.3. "Additional Interest" means an additional amount of interest calculated at the Additional Interest Rate. 1.4. Architect means collectively, those architects engaged by the Borrower or Property Owner for the development of the Fairway Village I Project. 1.5. "Bank One" means Bank One, N.A. 1.6. "Bank One Prime Rate" means the Prime Rate of Interest bearing that designation which is announced and revised from time to time by Bank One, which may not be the lowest interest rate charged to customers of Bank One. 1.7. "Base Interest" means an amount of interest calculated at the Base Rate or Default Rate, as applicable. 1.8. "Base Rate" means the base interest rate under the Note equal to the Bank One Prime Rate, as in effect from time to time, plus two hundred and fifty (250) Basis Points. 1.9. "Basis Point" means one one-hundredth (1/100) of one percent (1%) 1.10. "Borrower" means individually and collectively, IGC and ACPT. 1.11. "Business Day" means (a) for all purposes other than those covered by clause (b) below, any day except Saturday, Sunday and any day which shall be in Columbus, Ohio a legal holiday or a day on which banking institutions are authorized or required to close. 1.12. "Closing Date" means the date of this Agreement. 1.13. "Collateral" has the meaning set forth in Section 2.6.2 hereof. 1.14. "Construction Contracts" has the meaning set forth in Section 2.4.1 hereof. 1.15. "Contracts" has the meaning set forth in Section 2.6.2 hereof. 1.16. "Contract Assignment" has the meaning set forth in Section 2.6.2. 1.17. "Deed of Trust" has the meaning set forth in Section 2.6.2 hereof. 1.18. "Deed of Trust Property" has the meaning set forth in Section 2.6.2 hereof. 1.19. "Default" means an event or condition which constitutes, or which after giving of notice or lapse of time, or both, would constitute, an Event of Default. 1.20. "Default Period" means, with respect to the Loan, (i) any period of time commencing with the maturity of the Loan (whether by acceleration or otherwise) and continuing until the unpaid principal amount of the Loan, together with all interest accrued and unpaid thereon, is paid in full, and/or (ii) any period of time during which an Event of Default (as described in Section 8.1) has occurred and is continuing hereunder irrespective of whether or not the maturity of the Loan has been accelerated or the payment of the Loan has been demanded. 1.21. "Default Rate" means the Base Rate in effect from time to time, plus four hundred (400) Basis Points. 1.22. "Deposit Pledge Agreement" means that certain Deposit Pledge Agreement dated as of the date hereof, by and between Borrower and Lender. 1.23. "Development Budget" has the meaning set forth in Section 2.4.2(c) hereof. 1.24. "Development Completion Date" has the meaning set forth in Section 2.4.2 hereof. 1.25. "Development Escrow Account" has the meaning set forth in Section 2.4.9 hereof. 1.26. "Development Period" has the meaning set forth in Section 2.4.1 hereof. 1.27. "Enforcement Costs" has the meaning set forth in Section 9.3 hereof. 1.28. "Event of Default" has the meaning set forth in Section 8 hereof. 1.29. "Fairway Village I Loan Advances" shall have the meaning set forth in Section 2.4.3. 1.30. "Fairway Village Property" has the meaning set forth in Section 2.1 hereof. 1.31. "Fairway Village I Project" shall mean the development of Seventy-Nine (79) individual residential lots within Fairway Village, the completion of Billingsley Road through Fairway Village and the adjacent business park, and the construction of a water sewer station on the Fairway Village Property. 1.32. "Financing Documents" as used in this Agreement means collectively and includes this Agreement, the Note, Mirror Note, Property Owner Guaranty, Key Principals Guaranty, Wilson Guaranty, the Deed of Trust, the Assignment Agreement, the Contract Assignment, the Deposit Pledge Agreement, and any other instrument, document, certificate or agreement both now and hereafter executed, delivered or furnished by the Borrower, the Property Owner, the Guarantors, or any other person (as hereinafter defined) evidencing, guaranteeing, securing or in connection with this Agreement or all or any part of the Obligations. 1.33. "Force Majeure" has the meaning set forth in Section 2.4.4 hereof. 1.34. "GAAP" means generally accepted accounting principles in the United States of America in effect as of the date of this Agreement, consistently applied. 1.35. "General Contractor" means collectively, those general contractors engaged by Borrower and/or Property Owner for the development of the Fairway Village I Project. 1.36. "Governmental Authority" means any nation or government, any state or other politiCal subdivision thereof and any entity or person exercising applicable executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, including, without limitation, any department, commission, board, bureau, agency, administration, official, service or other instrumentality of the United States of America, of any state, the District of Columbia, municipality or any other governmental entity. 1.37. "Guarantee" means any obligation, contingent or otherwise, of any Person guaranteeing or having the economic effect of guaranteeing any indebtedness, liabilities or obligations of any other Person in any manner, whether directly or indirectly, and including, without limitation, any obligation of such Person, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such indebtedness, liabilities and obligations or to purchase (or to advance or supply funds for the purchase of) any security for the payment of such Indebtedness, (b) to purchase property, securities or services for the purpose of assuring the owner of such indebtedness, liabilities and obligations of the payment of such indebtedness, liabilities and obligations, (c) to maintain working capital, equity capital or other financial statement condition of the primary obligor or to make loans or advances to the primary obligor so as to enable the primary obligor to pay such indebtedness, liabilities and obligations, or (d) incurred for the purpose of assuring in any other manner the obligee of such indebtedness, liabilities and obligations or other obligation of the payment thereof or to protect such obligee against loss in respect there (provided however, that the position of any Person, as a general partner, in and of itself, shall not be a "Guarantee" as defined hereunder) 1.38. "Guarantor" and "Guarantors" shall mean Property Owner, Key Principals, and/or James J. Wilson, as the case may be. 1.39. "IGC" means Interstate General Company, L.P., a Delaware limited partnership. 1.40. "IGP" means Interstate General Properties Limited Partnership S.E., a Maryland limited partnership, of which IGC is general partner and holds a 1% general and 99% limited partnership interest and James J. Wilson is an additional general partner without a percentage interest. 1.41. "Improvements" has the meaning set forth in Section 2.1 hereof. 1.42. "Indebtedness" means, with respect to any Person, all liabilities, obligations and indebtedness of such Person of any nature whatsoever, whether matured or unmatured, direct or contingent, liquidated or unliquidated, joint or several, including, without limitation (a) such liabilities, obligations and indebtedness which, in accordance with GAAP, should be included on the liability side of such Person's balance sheet, or to which reference should be made by footnotes thereto, (b) all liabilities, obligations and indebtedness of such Person for borrowed money, whether or not evidenced by bonds, debentures, notes or similar instruments, (c) the face amount of all letters of credit issued for the account of such Person, (d) all indebtedness, liabilities and obligations secured by any Lien on any property owned or acquired by such Person, whether or not such Person has assumed or become liable for the payment of such indebtedness, liabilities and obligations, (e) all Guarantees and endorsements of such Person, (f) all obligations of such Person under any conditional sale or other title retention agreement relating to property purchased by such Person, and (g) all obligations of such Person issued or assumed for the deferred purchase price of property or services. 1.43. "Interest" means the interest payable hereunder or under the Note at the Base Rate or Default Rate, as applicable, and Additional Interest. 1.44. "Interest Period" means, with respect to the principal amount of the Loan which is to bear interest at the Base Rate, initially, the period commencing on the date hereof and ending on the last calendar day of this month, and thereafter, each period commencing on the first day of the calendar month immediately following the previous Interest Period and ending on the last calendar day of such month, but in no event after the Scheduled Maturity Date. 1.45. "Key Principals" means collectively, James J. Wilson, J. Michael Wilson, and Edwin L. Kelly. 1.46. "Key Principals' Guaranty" has the meaning set forth in Section 2.6.1.2. 1.47. "Land Records" means the Land Records of Charles County, Maryland. 1.48. "Late Charge" has the meaning set forth in Section 2.5.9 hereof. 1.49. "Lien" means any interest in property securing any obligation owed to, or a claim by, a Person other than the owner of the property, whether such interest is based on the common law, statute or contract, and including but not limited to the lien or security interest arising from a deed of trust, mortgage, encumbrance, pledge, security agreement, conditional sale or trust receipt or a lease, consignment or bailment for security purposes. For the purposes of this Agreement, the Borrower shall be deemed to be the owner of any property which it ha~ acquired or holds subject to a conditional sale agreement, financing lease, or other arrangement pursuant to which title to the property has been retained by or vested in some other Person for security purposes. 1.50. "Loan" has the meaning set forth in Section 2.1. 1.51. "Loan Advance" and "Loan Advances" have the meanings set forth in Section 2.1 hereof. 1.52. "Lot" or "Lots" have the meanings set forth in SeCtion 7.1 hereof. 1.53. "Mirror Note" has the meaning set forth in Section 2.5.5. 1.54. "NationsBank" means NationsBank, N.A. 1.55. "Note" has the meaning set forth in Section 2.5.5. 1.56. "Obligations" means collectively and includes (i) all present and future liabilities and obligations of any kind and nature whatsoever of the Borrower to the Lender both now existing and hereafter arising under, as a result of, on account of, or in connection with, the Loan, this Agreement and any and all amendments thereto, restatements thereof, supplements thereto and modifications thereof made at any time and from time to time hereafter, (ii) the Note and any extensions, renewals or replacements thereof, amendments thereto and restatements or modifications thereof made at any time or from time to time hereafter, (iii) the Mirror Note, (iv) the Property Owner Guaranty, (v) the Deed of Trust, and/or (vi) the other Financing Documents, including, without limitation, future advances, principal, interest, indemnities, fees, late charges, enforcement costs and other costs and expenses, whether direct, contingent, joint, several, joint and several, matured or unmatured. 1.57. "Option Agreement" has the meaning set forth in Section 2.6.3. 1.58. "Pending Litigation" has the meaning set forth in Section 2.3.1. 1.59. "Person" or "person" means and includes an individual, a company, a corporation, a partnership, a joint venture, a trust, an unincorporated association, a Governmental Authority or any other entity. 1.60. "Plans and Specifications" has the meanings set forth in Section 2.4.1 hereof. 1.61. "Plan of Remediation" has the meaning set forth in Section 2.3.2. 1.62. "Principal Amount" has the meaning set forth in Section 2.1 hereof. 1.63. "Principal Payment Date" has the meaning set forth in Section 2.5.1 hereof. 1.64. "Project" has the meaning set forth in Section 2.1 hereof. 1.65. "Property" means collectiVely, the Fairway Village Property and all other land and property of the Property Owner set forth on Exhibit 1.65, and which serves as collateral securing the Property Owner Guaranty pursuant to the Deed of Trust. 1.66. "Property Owner" means St. Charles Community, LLC, a Delaware limited liability company. 1.67. "Property Owner Guaranty" has the meaning set forth in Section 2.6.1 hereof. 1.68. "Release Payment" has the meaning set forth in Section 7.4.1 hereof. 1.69. "Release Payment Proceeds Account" has the meaning set forth in Section 7.4.5 hereof. 1.70. "Remediation Costs" has the meaning set' forth in Section 2.3.2 hereof. 1.71. "Remediation Reserve Account" has the meaning set forth in Section 2.3.2 hereof. 1.72. "Requisitions" has the meaning set forth in Section 2.4.3. 1.73. "Scheduled Maturity Date" has the meaning set forth in Section 2.5.1 hereof. 1.74. "Structuring Fee", has the meaning set forth in Section 2.1 hereof. 1.75. "Subcontracts" means any and all contracts of subcontractors or suppliers of labor or material entered into by the Borrower or Property Owner in connection with the development of the Fairway Village I Project in amounts equal to or greater than $50,000.00. 1.76. "Subsequent Advance" has the meaning set forth in Section 2.5.6. 1.77 "Title Company" has the meaning set forth in Section 3.1.8 hereof. 1.78. "Title Insurance Policy" has the meaning set forth in Section 3.1.6 hereof. 1.79. "Trustee(s)" shall mean the trustees named under the Deed of Trust. 1.80. "Wilson Guaranty" has the meaning set forth in Section 2.6.1.3 hereof. All accounting terms which are not expressly defined herein, shall have the meanings given them in accordance with GAAP. Unless otherwise defined herein, all terms used herein which are defined by the Maryland Uniform Commercial Code shall have the same meanings as assigned to them by the Maryland Uniform Commercial Code unless and to the extent varied by this Agreement. The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement~as a whole and not to any particular provision of this Agreement, and section, subsection, schedule and exhibit references are references to sections or subsections of, or schedules or exhibits to, as the case may be, this Agreement unless otherwise specified. As used herein, the singular number shall include the plural, the plural shall include the singular and the use of the masculine, feminine or neuter gender shall include all genders, as the context may require SECTION 2. The Loan. 2.1. The Loan Facility. Subject to and upon the terms, conditions and provisions of this Agreement and relying upon the representations and warranties set forth herein, the Lender agrees to make a loan to the Borrower in the aggregate principal amount of up to Twenty Million Dollars ($20,000,000), as determined by Lender in its sole discretion, (the "Loan"), and the Borrower agrees to borrow the proceeds of the Loan as and when such proceeds are to be advanced, and to use the proceeds of the Loan for the purposes set forth herein. The proceeds of the Loan will be advanced or disbursed from time to time by the Lender to or for the account of the Borrower subject to and in accordance with the provisions of this Agreement (each such advance or disbursement is herein called a "Loan Advance" and collectively the "Loan Advances") and the Borrower shall use (i) $11,000,000 of the Loan proceeds advanced to payoff and satisfy certain existing indebtedness of Borrower to NationsBank, to reimburse certain affiliates of Borrower for amounts paid on behalf of Borrower, to recover certain remediation expenses and to pay certain outstanding accounts payable and closing costs, pursuant to the terms and conditions of Section 2.2 hereof, and to satisfy certain alleged liabilities of the Borrower and certain affiliates to the United States Government resulting from the Pending Litigation pursuant to Section 2.3 hereof (ii) $5,000,000 of the Loan proceeds advanced to be used to satisfy or to establish certain reserves necessary for the satisfaction of certain potential liabilities of the Borrower arising or resulting from the Pending Litigation, also pursuant to the terms and conditions of Section 2.3 hereof; and (iii) the remainder of the Loan proceeds advanced to provide financing to the Property Owner's for certain infrastructure development relating to or in connection with the Borrower's and/or Property Owner development of residential and commercial building lots (the "Improvements") for that certain real property located in Charles County, Maryland known as Fairway Village (the "Fairway Village Property"), pursuant to the terms and conditions of Section 2.4 hereof. The development of the Improvements together with the Fairway Village Property, including the development of four hundred (400) residential building lots, shall herein be collectively referred to as the "Project". The term "Principal Amount" as used in this Agreement means, as of any date, the unpaid principal amount of the Loan advanced pursuant to the provisions of this Agreement and outstanding on such date. In consideration of Lender's agreement to make the Loan to Borrower, on the Closing Date and prior to the initial Loan Advance, Borrower shall pay to Lender a loan structuring fee equal to Two Hundred (200) Basis Points of the Loan amount (the "Structuring Fee") which amount may be paid out of the initial Loan Advance. 2.2. Payoff of NationsBank, Reimbursement and Accounts Payable 2.2.1. Payoff of NationsBank. On the Closing Date, Lender shall make a Loan Advance to Borrower in an amount equal to approximately $6,800,000 (the "NationsBank Payoff Loan Advance") to be used by Borrower or reloaned to Property Owner to satisfy on its behalf and on behalf of Property Owner that certain indebtedness of the Borrower and Property Owner to NationsBank, known as the Westbury Loan, the Industrial Land Loan and the St. Charles Loan (collectively, the "NationsBank Indebtedness"). Contemporaneously with the funding of the NationsBank Payoff Loan Advance, Borrower and/or Property Owner shall provide Lender with documentation acceptable to Lender in Lender's sole discretion, evidencing (i) the full and complete satisfaction of the NationsBank Indebtedness, (ii) the full release and discharge of any lien held by NationsBank against any of the Collateral, which secures the NationsBank Indebtedness, and (iii) the full release and discharge of any security interest granted by Borrower, Property Owner arid/or Guarantor to NationsBank or any of NationsBank's predecessors in interest with respect to the collateral. 2.2.2. Reimbursement to IGP. On the Closing Date, Lender shall make a Loan Advance to Borrower in an amount up to approximately $1,700,000 (the "IGP Loan Advance") to be used by Borrower to reimburse IGP for amounts paid by IGP for the benefit of Borrower to NationsBank. 2.2.3. Payment of Accounts Payable. On the Closing Date, Lender shall make a Loan Advance to Borrower in an amount up to $2,500,000 (the "Accounts Payable Loan Advance") to be used by Borrower to pay any and all costs and expenses of Borrower incurred in connection with the Loan (the "Loan Costs"), and to pay those certain accounts payable identified on Exhibit 2.2.3. 2.3. Establishment of Remediation Reserves and Payment of Pine. 2.3.1. Pending Litigation. In September, 1995, James J. Wilson, IGC and St. Charles Associates, L.P., a Delaware limited partnership ("SCA"), were indicted by the United States District Court for the District of Maryland for four (4) felony and four (4) misdemeanor violations of the Clean Water Act, 33 U.S.C. Section 1311(a) (the "Criminal Action"). On February 29, 1996, a jury convicted each of the aforementioned defendants of the four felony charges. IGC was fined Two Million Dollars ($2,000,000) and SCA was fined One Million Dollars ($1,000,000.00) (each fine is herein collectively, the "Fine"), and each IGC and SCA was placed on probation for five (5) years, and ordered to implement a wetlands restoration mitigation plan proposed by the United States Government. Each of the defendants has appealed the convictions and the accompanying punishments to the United States Court of Appeals for the Fourth Circuit. Such appeals are now pending as Appeal Nos. 96-4498, 96-4503 and 96-4537, respectively. In addition to the Criminal Action, the United States Government has initiated civil proceedings before the United States District Court for the District of Maryland against James J. Wilson, IGC and SCA, seeking injunctive relief and civil penalties arising out of the alleged discharge of dredge or fill material into approximately seventy acres of (70) wetlands in violation of the Clean Water Act (the "Civil Action") . The Civil Action has been stayed pending resolution of the Criminal Action. The Criminal Action together with the Civil Action is herein collectively, the "Pending Litigation") 2.3.2. Remediation Reserves. As part of the penalty for IGC and SCA's felony violation of the Clean Water Act, the United States District Court for the District of Maryland has ordered IGC and SCA to restore and mitigate certain of the damaged wetlands. In response to such order, the Borrower has proposed a plan of restoration and mitigation (the "Plan of Remediation"), at a cost to the Borrower in an approximate amount up to Two Million Dollars ($2,000,000.00) (the "Remediation Costs"). The Borrower and Lender hereby acknowledge and agree that Lender shall reserve from disbursement of the Loan an amount equal to the Remediation costs (the "Remediation Reserve Amount"), which reserve shall be made available to Borrower if and when Borrower is required to implement the Plan of Remediation. if and when Borrower shall require Lender to make Loan Advances from the Remediation Reserve (the "Remediation Loan Advances") , such Remediation Loan Advances shall be made pursuant to terms and conditions identical to the terms and conditions set forth in Section 2.4 herein, as if the Remediation Loan Advances were being made by Lender to Borrower for infrastructure development. 2.3.3. Payment of Fine. On the closing date, Lender shall make Loan Advance to Borrower in the amount of the Fine to be used by Borrower to satisfy the Fines. 2.4. Infrastructure Development. 2.4.1. Development of Fairway Village I Project. The Borrower and/or Property Owner has or will furnish to the Lender (a) plans and specifications, as modified from time to time (the "Plans and Specifications I') satisfactory to the Lender for the development of each part of the Fairway Village I Project to be developed with a portion of the proceeds of the Loan, Prepared by the Architect pursuant to an agreement by and between the Architect and the Property Owner and/or Borrower, in Substantially the form previously submitted and approved by the Lender (the "Architect's Agreement"), (b) the contracts by and between the General Contractor and the Property Owner and/or Borrower, in Substantially the form previously submitted and approved by the Lender (the "Construction Contracts"), providing for the development of the Fairway Village I Project in accordance with the Plans and Specifications during the period of time (the "Development Period") commencing as of the date hereof, and ending before the first day of the thirty-sixth (36th) complete calendar month from the date hereof (the "Development Completion Date"), and (c) a capital budget for the period of time during the Development Period, approved by the Lender, for the development of each part of the Fairway Village I Project during the Development Period showing, among other things, a cost breakdown for each category described in the capital budget and a description in such categories of the utilization of the Loan proceeds necessary for the completion of the Fairway Village I Project (the development budget, together with any changes, modifications, amendments, and supplements, each as expressly approved by the Lender in writing, in the Lender's sole and reasonable discretion, is herein the "Development Budget"), and a copy of which is attached hereto as Exhibit 2.4.1. 2.4.2. Loan Proceeds for Fairway Village I. Upon receipt, the Borrower will hold Fairway Village I Loan Advances made to it hereunder with respect to the development of the Fairway Village I Project for the benefit of the Property Owner and the Property Owner will use any amounts advanced by Borrower hereunder with respect to the development of the Project, for the purpose of paying the costs of development of the Fairway Village I Project substantially in accordance with the Plans and Specifications and the Development Budget. Without the prior written consent of the Lender, the Borrower and Property Owner shall not expend any part of the proceeds of the Loan allocated for the Fairway Village I Project for any purpose except in connection with the uses and purposes provided for in this Agreement. The Lender is hereby irrevocably authorized by the Borrower to make Fairway Village I Loan Advances to the Borrower pursuant to requests or requisitions signed by any one of the persons who are authorized to do so under the provisions of the authorizations of the general partner of the Borrower furnished to the Lender under the provisions of Section 3.1.1 hereof. The Lender assumes no responsibility or liability for any errors, mistakes or discrepancies in the oral, written, telephonic or other transmissions of any instructions, orders, requests or confirmations between the Lender and the Borrower for or in connection with the Loan or any Fairway Village I Loan Advances, except for errors, mistakes or discrepancies resulting solely from the Lender's actions or otherwise resulting from Lender's gross negligence or wilful misconduct. 2.4.3. Fairway Village I Loan Advances. (a) The Loan Advances for the Fairway Village I Project shall be advanced by Lender and used directly by Borrower or readvanced by Borrower for use by the Property Owner in accordance with the terms of this Section 2.4.3 (such Loan Advances are herein the "Fairway Village I Loan Advances") . Requests by Borrower for Fairway Village I Loan Advances shall be made on approved AlA Forms 702 and 703 or such other form as agreed to by Lender, and submitted to, and approved by, Lender, and signed by the authorized representative and certified by the General Contractor, showing the percentage of completion and setting forth in trade breakdown form in such detail as may be required by Lender the amounts expended and/or costs incurred for work done and materials incorporated into the Fairway Village I Project (the "Requisitions"). The Borrower shall submit with each Requisition a statement that the work completed to the date of such Requisition complies in all material,respects and is of quality consistent with the Plans and Specifications. After each Requisition is submitted, Lender shall have the right to inspect the Fairway VilLage I Project and verify the cost of the completed construction, the percentage of completion, compliance with Plans and Specifications, quality of work, and the materials or equipment installed. Any and all inspections made by the Lender or any agents or employees of the Lender are for the Lender's information and shall not be deemed to have been made for or on account of the Borrower. The Borrower hereby releases the Lender from any liability and responsibility whatsoever relating to the development of the Fairway Village I Project, the Plans and Specifications, and labor or materials supplied in connection therewith. If soft costs are a part of any Requisition, the Borrower shall furnish to the Lender such additional information as the Lender may reasonably require to assure that amounts requisitioned for soft costs are to be used for reimbursement for such costs previously paid by the Property Owner and/or the Borrower or to pay such costs incurred by the Property Owner and/or the Borrower which are due and payable. The Lender will have a period of five (5) Business Days to fund each Requisition approved by the Lender, but in no event shall Lender be obligated to make Fairway Village I Loan Advances more frequently than once per calendar month. (b) If and to the extent the Borrower and/or Property Owner retains any portion of any advance to the General Contractor, the Fairway Village I Loan Advances for development costs shall be subject to the identical funding and retainage requirements (the "Retainage") . The Retainage shall only be released to Borrower upon satisfaction of all conditions precedent to the Lender' s obligation to make the final Fairway Village I Loan Advance, as provided under Section 3.2 hereof. (c) Notwithstanding the other provisions of this Agreement, if an Event of Default under this Agreement has occurred and is continuing, the Lender, may, at its sole option, and without liability to the Borrower and/or Property Owner, make any Fairway Village I Loan Advance directly to the General Contractor or to any persons furnishing labor, services, or materials used or to be used on or in the development of the Fairway Village I Project (including authorized extras) or to any combination of them, and may pay any loan fees, interest, taxes, appraisals, inspection fees, recording charges, legal fees and any other outstanding amounts, relating to the Project and the full cost of their completion. Any such Fairway Village I Loan Advance or payment shall be deemed to have been made to the Borrower or for its account. No further direction or authorization from the Borrower and/or Property Owner shall be necessary to warrant such direct Fairway Village I Loan Advances and all such Fairway Village I Loan Advances shall satisfy pro tanto the obligations of the Lender hereunder and shall be guaranteed by the Owner's Guaranty, which Owner's Guaranty shall be secured by the Deed of Trust, and secured by the other Financing Documents, as fully as if made to the Borrower, regardless of the disposition thereof by the party or parties to whom such Fairway Village I Loan Advance is made. The Lender shall in no event be responsible or liable to any person other than the Borrower for the disbursement of or the failure to disburse the Fairway Village I Loan Advances, and no third party, including, without limitation, the General Contractor, any subcontractor or any supplier of labor, services or materials, shall have any right or claim against the Lender under this Agreement or the administration thereof. (d) The Lender may advance, in its discretion, a portion of the Loan proceeds allocated for the Fairway Village I Project, to the Borrower, who will then reloan the proceeds to the Property Owner, to pay for costs of materials actually incurred by the Property Owner for materials stored on site at the Fairway Village I Project and which are required in connection with the development of the Fairway Village I Project, provided that (i) such materials are in accordance with the Plans and Specifications, (ii) such materials are securely stored on site and properly inventoried, (iii) the bills of sale and contracts under which such materials are being provided shall be in form and substance satisfactory to the Lender, and (iv) such materials are insured against casualty, loss and theft in a manner satisfactory to the Lender 2.4.4. Development and Completion of the Fairway Village I Project. In the event no Fairway Village I Loan Advance is made within ninety days (90) days of the date hereof, then any obligation of the Lender to make Fairway Village I Loan Advances shall terminate, unless extended by the Lender in its sole discretion. The Borrower and Property Owner agree to complete the Fairway Village I Project in accordance with the Plans and Specifications, subject to any requirements of Governmental Authorities on or before the Development Completion Date, time being of the essence, subject to events occasioned by strikes, lock-outs, war or civil disturbance, natural disaster, acts of God or illegal acts of third parties beyond the control of Borrower and/or Property Owner ("Force Majeure") . The Lender shall have no obligation to make Fairway Village I Loan Advances after the expiration of the Development Period. 2.4.5. Additional Funds. If at any time the unpaid costs to be incurred as determined from the Development Budget exceed the undisbursed Loan proceeds allocated for the Fairway Village I Project, as determined by the Lender in i~s sole but reasonable discretion, the Borrower and/or Property Owner shall provide from sources other than the Loan, funds necessary to pay the additional costs to complete the construction of the Fairway Village I Project in accordance with the Plans and Specifications. 2.4.6. Assignments. Without the prior written consent of the Lender, the Borrower and/or Property Owner shall not transfer, assign, pledge or hypothecate any right or interest in any payment or Fairway Village I Loan Advance made or to be made pursuant to this Agreement, any of the other benefits of this Agreement, or any of benefits under the other Financing Documents. Any assignment made or attempted by the Borrower and/or Property Owner without the prior written consent of the Lender shall be void and of no effect. No consent by the Lender to an assignment by the Borrower and/or Property Owner shall release the Borrower and/or Property Owner as the party primarily obligated and liable under the provisions of this Agreement unless the Borrower and/or Property Owner shall be released specifically by the Lender in writing. No consent by the Lender to an assignment shall be deemed to be a waiver of the requirement of prior written consent by the Lender with respect to each and every further assignment and as a condition precedent to the effectiveness of such assignment. 2.4.7 Assignment of Construction Contracts Plans and Specifications. Contemporaneously with the closing of the Loan, Property Owner shall assign to the Lender, as security for the Obligations, all of Property Owner's right, title and interest in and to (a) the Construction Contracts and Subcontracts, (b) the Plans and Specifications, and (c) any other contract entered into by Borrower or Property Owner in connection with the development of the Fairway Village I Project. 2.4.8. No Warranty by the Lender. The Lender makes no warranty, either express or implied, of the actual or designed capacity of the Fairway Village I Project or the suitability of the Fairway Village I Project for the purposes intended by the Property Owner or that the proceeds of the Loan allocated to the Fairway Village I Project will ultimately be sufficient to pay in full all costs of the development of the Fairway Village I Project in accordance with the Plans and Specifications or otherwise. 2.4.9. Establishment of Development Escrow Account. 2.4.9.1 Development Escrow Account. Contemporaneously herewith, the Borrower shall establish with Lender a Development Escrow Account (the "Development Escrow Account") . The Borrower shall deposit in the Development Escrow Account, the aggregate sum of One Million Dollars ($1,000,000.00) in equal semi-annual payments beginning on or before February 1, 1998, and August 1, 1998, in the amounts of Five Hundred Thousand Dollars ($500,000.00). Funds deposited in the Development Escrow Account shall earn interest at the rate in effect from time to time for a Ba