CHARTER MUNICIPAL MORTGAGE ACCEPTANCE CO - 10-K Annual Report

Back to GetFilings.com

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(Mark One)

X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------- EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2001

OR

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

Commission File Number 1-13237

CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
---------------------------------------------
(Exact name of Registrant as specified in its Trust Agreement)

Delaware 13-3949418
- -------------------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

625 Madison Avenue, New York, New York 10022
- --------------------------------------------- -----------------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (212) 421-5333

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class
-------------------------------------------------
Shares of Beneficial Interest

Name of each exchange on which registered:
-------------------------------------------------
American Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.

The approximate market value of the voting and non-voting common equity
held by non-affiliates of the Registrant as of March 20, 2002 as $653,820,288,
based on a price of $16.03 per share, the closing sales price for the
Registrant's shares of beneficial interest on the American Stock Exchange on
that date.

As of March 20, 2002 there were 41,152,738 outstanding shares of the
Registrant's shares of beneficial interest.

DOCUMENTS INCORPORATED BY REFERENCE

Part III: Those portions of the Registrant's Proxy Statement for the Annual
Meeting of Shareholders to be held on June 11, 2002, which are incorporated into
Items 10, 11, 12 and 13.

Index to exhibits may be found on page 90
Page 1 of 103

CAUTIONARY STATEMENT FOR PURPOSES OF
THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

WHEN USED IN THIS ANNUAL REPORT ON FORM 10-K, THE WORDS "BELIEVES,"
"ANTICIPATES," "EXPECTS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. STATEMENTS LOOKING FORWARD IN TIME ARE INCLUDED IN
THIS ANNUAL REPORT ON FORM 10-K PURSUANT TO THE "SAFE HARBOR" PROVISION OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH STATEMENTS ARE SUBJECT TO
CERTAIN RISKS AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY, INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH IN "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF.

2

PART I

Item 1. Business.

GENERAL

Charter Municipal Mortgage Acceptance Company ("CharterMac") is a Delaware
business trust. CharterMac and its subsidiaries (collectively, the "Company") is
a full service investor in and servicer of multifamily housing debt. The Company
is principally engaged in the acquisition and ownership (directly or indirectly)
of tax-exempt multifamily housing Revenue Bonds and may also acquire, at times,
taxable multifamily housing Revenue Bonds. Both the tax-exempt and the taxable
bonds are herein referred to as Revenue Bonds ("Revenue Bonds").

CharterMac is classified as a partnership for federal income tax purposes and,
thus, is not subject to federal income taxation. As such, CharterMac will pass
through to its shareholders, in the form of distributions, income, including
tax-exempt income, derived from its investments and activities. Although the
exact percentage may vary from quarter to quarter, substantially all of the
distributions to shareholders are excludable from gross income for federal
income tax purposes. For the calendar year ended December 31, 2001,
approximately 96% of the distributions qualified as tax-exempt income.

On January 14, 2002, the Company announced that its Board of Trustees had
formed a special committee to explore strategic alternatives for the
Company's future management structure, including internalization of
management, and ways to further diversify the Company's revenue sources. The
special committee consists of the independent members of the Board of
Trustees, Peter T. Allen, Arthur P. Fisch and Charles L. Edson. The special
committee has retained independent counsel and expects to hire a financial
advisor to assist them in this process.

THE PREDECESSOR

CharterMac was formed on October 1, 1997 as the result of the merger (the
"Merger") of three publicly registered limited partnerships: Summit Tax Exempt
Bond Fund, L.P., Summit Tax Exempt L.P. II and Summit Tax Exempt L.P. III (the
"Partnerships"). One of the general partners of the Partnerships was an
affiliate of Related Capital Company ("Related"), a nationwide, fully integrated
real estate financial services firm. Pursuant to the Merger, CharterMac issued
shares of beneficial interest ("Common Shares") to all partners in each of the
Partnerships in exchange for their proportionate interests. The Common Shares
commenced trading on the American Stock Exchange on October 1, 1997 under the
symbol "CHC."

SIGNIFICANT SUBSIDIARIES

CHARTERMAC EQUITY ISSUER TRUST

In 1999, CharterMac created CharterMac Equity Issuer Trust, a 100% owned
subsidiary, (collectively, with its subsidiaries, "Equity Issuer") which holds a
substantial portion of the Company's Revenue Bonds. From time to time, Equity
Issuer may issue Series A and Series B Cumulative Preferred Shares
(cumulatively, "Preferred Shares") to institutional investors. The Preferred
Shares have a senior claim to the tax-exempt income derived from the investments
owned by Equity Issuer. Any income in Equity Issuer after the payment of the
cumulative distributions on its Preferred Shares, and after the fulfillment of
certain covenants, may then be allocated to CharterMac. The assets of Equity
Issuer, while included in the financial statements of the Company, are legally
owned by Equity Issuer and are not available to any creditors of the Company
outside of Equity Issuer.

CHARTERMAC CORPORATION

In July 2001, the Company formed CharterMac Corporation ("CM Corp.") as a
wholly-owned, consolidated taxable subsidiary to help the Company more
efficiently manage its taxable business. CM Corp. allows the Company to better
diversify its business lines to include, among other things, mortgage
origination and servicing to third parties and guaranteeing mortgage loans for a
fee. CM Corp. will hold most of the Company's taxable investments, conduct any
fee-generating activities in which the Company may engage and provide management
services to CharterMac and its other subsidiaries. CM Corp. isolates a
substantial portion of the taxable income and expenses of the Company. Unlike
CharterMac, CM Corp. is a corporation which is subject to both Federal and State
income tax. Any distributions of net income from CM Corp. to CharterMac are
taxable and are passed through to the shareholders of CharterMac in its
dividend.

PW FUNDING, INC.

In December 2001, the Company, through CM Corp. acquired 80% of the outstanding
capital stock of PW Funding, Inc. and its subsidiaries ("PWF"), for
approximately $34.9 million, of which, approximately $21.6 million was financed
and $7.6 million was paid in cash. Additionally, the Company repaid a $5.7
million loan on behalf of PWF. It is anticipated that CM Corp. will acquire the
remaining 20% of the issued and outstanding capital stock of PWF over the next
24 to 36 months. Under the acquisition agreement, the stockholders of PWF were
granted the right to put their remaining 20% stock interest to CM Corp. after an
initial period of 24 to 36 months. The agreement also grants CM Corp. the right
to call the remaining 20% stock interest of PWF from PWF's stockholders after
the same initial period of 24 to 36 months.

PWF is a national mortgage-banking firm which specializes in providing financing
and ancillary services to the multifamily housing industry, including
construction and permanent debt financing, mortgage loan servicing and asset
management. Founded in 1971, PWF became one of the original Federal National
Mortgage Association ("Fannie Mae") Delegated Underwriter and Servicers ("DUS")
and is a Federal Housing Administration ("FHA") approved mortgagor. In 2000, PWF
joined a select group of Federal Home Loan Mortgage Corporation ("Freddie Mac")
Program Plus lenders through the acquisition of Larson Financial Resources, Inc.
("Larson").

Since 1988, PWF has originated more than $4 billion in multifamily and
commercial loans and currently services a $2.9 billion loan portfolio including
about $1.5 billion in Fannie Mae DUS loans and $595 million in Freddie Mac
loans. Over the past 5 years, the company has averaged more than $350 million
annually in loan originations. Together, PWF and its subsidiaries provide a full

3

range of financing services to the conventional multifamily market and
compliments CharterMac's principal business in the acquisition of tax-exempt
affordable housing Revenue Bonds.

CharterMac is entitled to a cumulative preferential distribution from PWF's cash
available for distribution equal to 10% of its invested capital. The remaining
cash available for distribution will be distributed approximately 80% to
CharterMac and 20% to the other stockholders. CharterMac will also be entitled
to an additional cumulative priority return equal to 4.3% of its invested
capital prior to the purchase payments to PWF's stockholders on exercise of the
put or call options. The fee income generated by PWF will be taxable income.
However, CM Corp. incurs tax-deductible expenses which will be used to offset a
portion of this taxable income.

GOVERNANCE

The Company is governed by a board of trustees comprised of three independent
managing trustees and five managing trustees who are affiliated with Related.
The Company utilizes the services and advice provided by CM Corp. and Related
Charter LP, an affiliate of Related Capital, to operate its day-to-day
activities and advise on the selection and underwriting of investments. CM Corp.
and Related Charter LP (collectively, the "Manager") provide these services
pursuant to management agreements between (i) CM Corp. and/or Related Charter LP
and CharterMac, and (ii) CM Corp. and each of the Company's subsidiaries. The
Manager has subcontracted its obligations under the management agreements to
Related and uses Related's resources and real estate and investment expertise to
advise the Company and provide it with services with a core group of experienced
staff and executive management. These services include, among other things,
acquisition, financial, accounting, capital markets, asset monitoring, portfolio
management, investor relations and public relations services. The Company
believes that it benefits significantly from its relationship with Related,
since Related provides the Company with resources that are not generally
available to smaller-capitalized, self-managed companies.

BUSINESS PLAN

The Company focuses on investing in a portfolio of Revenue Bonds that are
secured by affordable multifamily housing properties. Through PWF, the Company
focuses on originating and servicing multifamily mortgage loans on behalf of
Government Sponsored Enterprises ("GSEs") such as Fannie Mae, Freddie Mac and
the FHA. Together, these components offer a full range of capital solutions to
developers of affordable and market rate multifamily housing.

INVESTING IN TAX-EXEMPT REVENUE BONDS

In order to generate tax-exempt income to pass through to CharterMac
shareholders and, as a result, enhance the value of its Common Shares,
CharterMac primarily invests in or acquires tax-exempt Revenue Bonds secured by
multifamily properties. The Company believes that it can earn above market rates
of interest on its bond acquisitions by focusing its efforts primarily on
affordable housing. The Manager estimates that nearly 50% of all new multifamily
development contains an affordable component, which produces tax credits
pursuant to Section 42 of the Internal Revenue Code. The traditional methods of
financing affordable housing with tax-exempt Revenue Bonds are complex and time
consuming, and involve the participation of many intermediaries. Through the
Manager, the process has been streamlined using the Company's "Direct Purchase
Program." The Direct Purchase Program removes all intermediaries from the
financing process (except the governmental issuer of the Revenue Bond) and
enables developers to deal directly with one source. By purchasing Revenue Bonds
directly from the governmental issuer, the Company's program eliminates the need
for underwriters and their counsel, rating agencies and costly documentation.
This reduces the financing life cycle, often by several months, and also reduces
the bond issuance costs -- usually by 30% or more. In dealing directly with the
Company, developers feel more certain about the terms and timing of their
financing. The Company believes the savings in time and up-front costs and the
certainty of execution that the Company's program offers to developers allows
the Company to receive above-market rates of interest on Revenue Bonds.

In addition to investing in tax-exempt Revenue Bonds secured by multifamily
properties producing tax credits, the Company may acquire other multifamily
tax-exempt bonds including those issued to finance low-income multifamily
projects and facilities for the elderly owned by Section 501(c)(3)
not-for-profit organizations. The Company also has a portion of assets that
produce a small amount of taxable income.

OFFERING FINANCING THROUGH FANNIE MAE, FREDDIE MAC AND FHA

As a result of the acquisition of PWF, the Company has diversified the range of
its investment products and is able to offer developers fixed and floating rate
tax-exempt and taxable financing through Fannie Mae, Freddie Mac and, to a
lesser extent, FHA for affordable and market rate multifamily properties.
Combining this with the core business of investing in tax-exempt Revenue Bonds
and the Company's affiliation with Related, the Company is able to provide
developers with financing for all aspects of their property's capital structure.
In addition, the Company has diversified its revenues with a fee business that
will grow in value over time and will provide insulation from the vagaries of
the capital markets.

CREDIT ENHANCEMENT TRANSACTIONS

In addition to expanding the Company's business lines to include providing
mortgage origination and servicing to third parties, the Company has also begun
guaranteeing third party mortgage loans for a fee. In 2001, the Company executed
its first credit enhancement transaction. In such transactions, the Company will
generally receive a guarantee fee in return for assuming a first loss position
on a pool of multifamily mortgages. The Company expects to be able to
selectively grow the value of this new fee business over time.

4

CMBS INVESTMENT

In October 2001, the Company purchased 739,741 units of Series A Convertible
Preferred Membership Interests ("Membership Interests") in ARCap Investors,
L.L.C. ("ARCap") at the price of $25.00 per unit, for an aggregate face amount
of approximately $18.5 million, with a preferred return of 12.00%. ARCap was
formed in January 1999 by REMICap and Apollo Real Estate Investors to invest
exclusively in unrated subordinated Collateralized Mortgage-Backed Securities
("CMBS"). As of December 31, 2001, ARCap had approximately $596 million in
assets, including investments of approximately $565 million of CMBS.
Approximately one-third of ARCap's CMBS are secured by multifamily properties.

As of December 31, 2001, ARCap had approximately $78.1 million of Common
Membership Interests outstanding, which are subordinate to the Company's
Membership Interests. ARCap's leverage is predominantly fixed rate, long-term
financing and, as of December 31, 2001, ARCap had approximately $322.1 million
of debt outstanding, representing 54% of its capitalization.

CORPORATE STRATEGY

The Company does not operate as a mortgage REIT, which generally utilizes high
levels of leverage to acquire subordinated interests in commercial and/or
residential mortgage-backed securities. Mortgage REITs typically incur leverage
at ratios ranging from between 3:1 to 10:1. Conversely, and pursuant to its
Trust Agreement, the Company is only able to incur leverage or other financing
up to 50% of the Company's Total Market Value (as defined in the Trust
Agreement) as of the date incurred. Furthermore, the Revenue Bonds owned by the
Company generally call for ten-year restrictions from prepayments, eliminating
the Company's susceptibility to significant levels of repayment risk as a result
of interest rate reductions. Due to the Company's low level of leverage, the
Company is less likely than higher leveraged REITs to be affected by any lack of
liquidity. The Company's portfolio does not contain assets that are especially
vulnerable to volatility during periods of interest rate fluctuations.
Consistent with the foregoing, the Company focuses on providing investors with a
stable level of distributions, even through unstable markets.

Although the Company expects to be able to increase income from its taxable
business, it is not expected that the taxable portion of any distributions will
increase proportionately with the amount of taxable income generated. This is
because CM Corp., as a taxable subsidiary, can reduce income by deducting
certain expenses which qualify for income tax purposes.

BUSINESS SEGMENTS

As a result of the December 2001 acquisition of PWF, the Company has two
reportable business segments: an investing segment and an operating segment.

The investing segment consists of subsidiaries holding investments in Revenue
Bonds producing primarily tax-exempt interest income.

The operating segment generates taxable interest and fee income. Taxable
interest income is generated through the ownership of taxable bonds, certain
taxable loans and other investments. Taxable fee income includes loan
origination and loan servicing fees (through PWF) on portfolios for third
parties, fees earned and associated with the acquisition or origination of
Revenue Bonds, and fees for credit enhancement and guaranty services.

Segment results include all direct and contractual revenues and expenses of each
segment and allocations of indirect expenses based on specific methodologies.
These reportable segments are strategic business units that primarily generate
revenue streams that are distinctly different and are generally managed
separately. Segment reporting is applicable beginning after the year ended
December 31, 2001; prior to the year ended December 31, 2001 all of the
Company's operations were attributable to the investing segment. Since the
acquisition of PWF took place in late December 2001, there was no impact on the
Company's revenues or net income.

REVENUE BONDS

Generally, Revenue Bonds are secured by mortgage loans on underlying
properties ("Underlying Properties"). As of December 31, 2001, 97.7% of the
Revenue Bond par amount owned by the Company were first mortgage Revenue
Bonds. Revenue Bonds that contain provisions for the Company to receive
additional interest payments by participating with the borrower in a portion
of the cash flow, sale or refinancing proceeds on the Underlying Properties
are referred to as "participating"; Revenue Bonds lacking this provision are
referred to as "non-participating". As of December 31, 2001 14% of the
Company's Revenue Bonds were participating bonds.

As of December 31, 2001 there was an aggregate of 148 Revenue Bonds. The
Underlying Properties securing these Revenue Bonds are garden apartments located
in major metropolitan markets in 23 states and the District of Columbia. The
properties range in size from 70 units to 550 units with an average size of 214
units. Generally, the properties have a market appropriate, competitive amenity
package which may include swimming pools, clubhouses, exercise rooms and tennis
courts. Of these, 63 Revenue Bonds, with an original par amount of approximately
$438 million, had Underlying Properties either under construction or undergoing
major rehabilitation. There were also 24 Revenue Bonds, with an original par
amount of approximately $188 million in the lease-up stage. The remaining 61
Revenue Bonds in the portfolio have properties with stabilized occupancies. The
stabilized portfolio as of December 31, 2001 reports an average occupancy of
94.2%.

The principal and interest payments on each Revenue Bond are payable only from
the cash flows of the Underlying Properties, including proceeds from a sale of
an Underlying Property or the refinancing of the mortgage loan securing such
Revenue Bonds (the "Mortgage Loans"). None of the Revenue Bonds constitute a
general obligation of any state or local government, agency or

5

authority. The structure of each Mortgage Loan mirrors the structure of the
corresponding Revenue Bond that it secures. In order to protect the tax-exempt
status of the Revenue Bonds, the owners of the Underlying Properties are
required to enter into certain agreements to own, manage and operate the
Underlying Properties in accordance with requirements of the Internal Revenue
Code of 1986, as amended.

Revenue Bonds generally are not subject to optional prepayment during the first
five to ten years of the Company's ownership of the bonds and may carry
prepayment penalties thereafter generally beginning at 5% of the outstanding
principal balance, declining by 1% per annum. Certain Revenue Bonds may be
purchased at a discount from their face value. Up to 15% of the Total Market
Value of the Company (as defined in its Trust Agreement) may be invested in
Revenue Bonds secured by Underlying Properties in which affiliates of the
Manager have a controlling interest, equity interest or security interest. The
15% limit is not applicable to properties to which the Manager or its affiliates
have taken title for the benefit of the Company and only applies to Revenue
Bonds acquired after the Merger. In selected circumstances and generally only in
connection with the acquisition of tax-exempt Revenue Bonds, the Company may
acquire a small amount of taxable bonds (i) which the Company may be required to
acquire in order to satisfy state regulations with respect to the issuance of
tax-exempt bonds and (ii) to fund certain costs associated with the issuance of
Revenue Bonds, that under current law cannot be funded by such Revenue Bonds.

From time to time, the Company has advanced funds to owners of certain
Underlying Properties in order to preserve the underlying asset. Such
preservation may include funds for construction completion, past due real estate
taxes, remedial deferred maintenance or other operating deficiencies. Promissory
notes and/or second mortgages typically secure such advances. As of December 31,
2001, the face amount of such advances was approximately $12.6 million, with
rates ranging from 8% to 13% and a carrying value of approximately $7.2 million,
(net of purchase accounting adjustments), and a reserve for collectibility of
$138,000. Included in such amounts were advances to obligors which are
affiliates of the Manager at an aggregate face amount of approximately $5
million, with rates ranging from 8% to 10%.

With respect to Revenue Bonds which are subject to forbearance agreements with
their respective obligors, the difference between the stated interest rates and
the rates paid (whether deferred and payable out of available future cash flow
or, ultimately, from sale or refinancing proceeds) is not accrued for financial
statement purposes. The accrual of interest at the stated interest rate will
resume once an Underlying Property's ability to pay the stated rate has been
adequately demonstrated. Unrecorded contractual interest income was
approximately $662,000, $1.6 million and $1.9 million for the years ended
December 31, 2001, 2000 and 1999, respectively. Payments under each of the
existing forbearance agreements are current as of December 31, 2001.

PARTICIPATING REVENUE BONDS

Participating Revenue Bonds with an aggregate face amount of approximately $163
million as of December 31, 2001, call for interest only debt service payments
during their respective terms (which generally are 24 to 30 years from issuance
or re-issuance) with repayment of principal due in a lump sum "balloon" payment
at the expiration of their respective terms or upon sale or refinancing. In
addition to the stated base rates of interest, these Revenue Bonds provide for
"participating interest" which is based on a percentage of the underlying
properties cash flow or net sales/refinancing proceeds. Both the stated and
participating interest on the Revenue Bonds are exempt from federal income
taxation. During the years ended December 31, 2001, 2000 and 1999, the Company
was paid participating interest amounting to approximately $1.5 million, $1.7
million and $728,000, respectively.

NON-PARTICIPATING REVENUE BONDS

Non-participating, tax-exempt Revenue Bonds, with an aggregate face amount of
approximately $1 billion as of December 31, 2001, generally bear a fixed base
interest rate and may or may not provide for amortization of principal. Terms
are expected to be 5 to 35 years, although the Company may have the right to
cause repayment prior to maturity through a mandatory redemption feature
(five to seven years with up to six month's notice). Bonds that call for
amortization or "sinking fund" payments of principal are usually based on
thirty to forty year level debt service amortization schedules with
amortization generally beginning at the completion of rehabilitation or
construction.

Certain other non-participating Revenue Bonds, with an aggregate face amount of
approximately $13 million are taxable and call for amortization or sinking fund
payments of principal on a term ranging between 13 and 40 years.

MODIFIED REVENUE BONDS

From time to time, the Company, as an alternative to foreclosure in the event of
default, enters into forbearance agreements and/or permanent modifications with
certain borrowers. The determination as to whether it is in the best interest of
the Company to enter into permanent modifications or forbearance agreements, to
advance second mortgages, or alternatively, to pursue its remedies under the
loan documents, including foreclosure, is based upon several factors. These
factors include, but are not limited to, Underlying Property operations and
performance, owner cooperation and projected costs of foreclosure and litigation
- - irrespective of whether or not the obligor has an affiliation with the
Manager. These modifications have generally encompassed an extension of the
maturity together with a prepayment lock out feature and/or prepayment penalties
together with an extension of the mandatory redemption feature (5-10 years from
modification). Stated interest rates have also been adjusted together with a
change in the participating interest features. Base interest rates,
participating interest, prepayment lock-outs, mandatory redemption and maturity
features are arrived at through negotiations between the Company and the owners
of the Underlying Properties and vary dependent on the facts of a particular
Revenue Bond, the owner of the Underlying Property, the Underlying Property's
performance and requirements of bond counsel and local issuers. Should
negotiations break down, the Company has the option to pursue its other remedies
including acceleration and foreclosure. The Company may agree to the
modification of other Revenue Bonds to generally reflect similar terms as those
modified previously, where and as appropriate. Significant modifications to
interest rates and maturity dates are subject to final approval of the local
issuers, bond counsel and indenture trustees.

6

In connection with the sale of two of the Underlying Properties, Cedar Creek and
Pelican Cove, the Company has agreed to a modification of the terms of the
respective Revenue Bonds. Subject to the local issuer's approval, the stated
interest rate of the Cedar Creek and Pelican Cove Revenue Bonds will be modified
to a stated interest rate of 7.43% and 7.25%, respectively, and the maturity and
call dates for each will be extended to October 1, 2010 and October 1, 2020,
respectively.

On June 1, 2001, the Company agreed to a modification of the terms of the
Revenue Bond secured by the Loveridge Apartments Project. The stated interest
rate was reduced from 8% to 7.5% and the call date was extended to June 1, 2004.
As of December 31, 2001, this bond had a carrying value and fair value of
approximately $6.9 million and $7.4 million, respectively. In addition to the
above three Revenue Bonds, other Revenue Bonds, with an aggregate face amount of
approximately $154 million, have previously been modified.

REVENUE BONDS WITH THE OBLIGOR AS AN AFFILIATE OF THE MANAGER

The obligors of Revenue Bonds with an aggregate approximate original par amount
of approximately $612 million are partnerships in which affiliates of the
Manager own a 1% general partner interest. In addition, the original owners of
underlying properties and obligors of approximately $12.1 million of Revenue
Bonds have been replaced with affiliates of the Manager who have not made equity
investments. These affiliate entities could have interests that do not coincide
with, and may be adverse to, the interests of the Company. Negotiations, if any,
with respect to modifications of Revenue Bonds between the Company and obligors
who are affiliates may be affected by these conflicts as the Manager determines
the appropriate terms and conditions of modifications or otherwise opts for some
other remedy including foreclosure.

The original obligors and owners of the Underlying Properties of the Cedar
Creek, Highpointe, Pelican Cove and Loveridge Revenue Bonds have been replaced
with affiliates of the Manager who have not made equity investments. These
affiliates have assumed the day-to-day responsibilities and obligations of the
Underlying Properties. On September 29, 2000, the affiliates of the Manager sold
49% of Pelican Cove and Cedar Creek. During 2001 the remaining 51% of Pelican
Cove and Cedar Creek were purchased by the same buyers who purchased the initial
49%. Also in 2001, ownership of the property underlying the Loveridge Revenue
Bond was transferred to Loveridge L.P., also an affiliate of the Manager. During
June 2001, the affiliates of the Manager sold 49% of Loveridge. The remaining
51% was sold in January 2002, to the same buyer who purchased the initial 49%. A
buyer is being sought for the remaining Underlying Property-Highpointe.
Highpointe is generally paying as interest an amount equal to the net cash flow
generated by operations, which is less than the stated rate of the Revenue Bond.
The Company has no present intention of declaring default on this Revenue Bond.
The aggregate carrying value of Highpointe at December 31, 2001 and December 31,
2000 was approximately $5.7 million and $5.6 million, respectively, and the
income earned from Highpointe for the years ended December 31, 2001 and 2000 was
approximately $315,000 and $420,000, respectively.

IMPAIRED REVENUE BOND

During the second quarter of 2001, one Revenue Bond, Lexington Trails, became
impaired. The Company did not receive the regular interest payments on this
Revenue Bond of $210,000 for the period April through September of 2001. The
Company has recorded a reserve against these interest payments. On November 6,
2001, the trustee, for the benefit of the Company, foreclosed on the Underlying
Property. Bond payments were received for October through December of 2001. As a
result of the foregoing, the Company has written the Revenue Bond down to its
estimated fair value of approximately $5.5 million, resulting in a loss on
impairment on this bond of $400,000. Management estimated the fair value of this
Revenue Bond using the estimated fair value of the Underlying Property.

REVENUE BOND REPAYMENTS

During the period January 1, 2001 through December 31, 2001, three Revenue Bonds
and one note were repaid and one RITE was terminated as described in the table
below.

7

During the period January 1, 2000 through December 31, 2000, three Revenue Bonds
were repaid and two RITES were terminated as described in the table below.

8

REVENUE BONDS - CHARACTERISTICS

The following table provides certain information with respect to each of the
Revenue Bond as of December 31, 2001:

REHABILITATION BOND PORTFOLIO

12

1. LIHTC bonds are bonds for which the owner of the Underlying Property is
eligible to receive Low Income Housing Tax Credits. Bonds for which the
obligor is a non-for- profit entity under Section 501( c)(3) of the
Internal Revenue Code are classified as 501 ( c)(3) bonds. Other bonds are
those which are neither LIHTC or 501( c)(3) bonds.

2. The Revenue Bonds are deemed to be available-for-sale debt securities and,
accordingly, are carried at their estimated fair values at December 31,
2001 in accordance with FAS 115.

3. The stated interest rate represents the coupon rate of the Revenue Bond at
December 31, 2001.

A. Owned by the Company, not including its consolidated subsidiaries.
B. Owned by CM Holding, a consolidated subsidiary of the Company (see Merger)
C. Owned by CharterMac Equity Issuer Trust, a consolidated subsidiary of the
Company (see Merger)
D. Owned by CharterMac Origination Trust I, a consolidated subsidiary of the
Company (see Merger)
E. Owned by CharterMac Owner Trust I, a consolidated subsidiary of the Company
(see Merger)
F. Owned by CharterMac Corporation, a consolidated subsidiary of the Company.
G. Held by Merrill Lynch as collateral for secured borrowings (see
P-FLOATS/RITES below).
H. Held by Merrill Lynch as collateral in connection with the Merrill Lynch
P-FLOATS/RITES Program (see P-FLOATS/RITES below).
I. Held as collateral in connection with the TOP (see Private Label Tender
Option Program below).
J. Transferred to CharterMac Owner Trust I in connection with the TOP (see
Private Label Tender Option Program below).
K. The obligors of these Revenue Bonds are partnerships in which affiliates of
the Manager are partners that own a controlling interest.
L. The original owner of the Underlying Property and obligor of the Revenue
Bond has been replaced with an affiliate of the Manager.

14

M. The minimum interest rate is the cash flow of the property
N. In the event the construction of the Underlying Property is not completed
in a timely manner, the Company may "put" the Revenue Bond to the
construction lender at par.
O. In the event the rehabilitation of the Underlying Property is not completed
in a timely manner, the Company may "put" the Revenue Bond to the
construction lender at par.
P. All of the "puts" (see N and O above) are secured by a letter of credit
issued by the construction lender to the Company.
Q. The Revenue Bond is currently awaiting approval from the Issuer for
modification. The Company is confident that the modification will occur and
has therefore shown the terms of the Revenue Bond as per a forbearance
agreement which mirrors the terms of the Revenue Bond modification.
R. The Company received participating interest during 2001.
S. A third party has the option to acquire these Revenue Bonds for an
aggregate price of $35,250,000. The notice to exercise the option, on or
about March 18, 2002, was re- ceived by the Company on February 15, 2002.
T. The Company is permitted to call the Revenue Bond with six months written
notice.
U. The interest rate for this Revenue Bond is 8.5% through September 1, 2002
and 7.5% thereafter.
V. The interest rate for this Revenue Bond is 8.15% through March 1, 2003 and
7.6% thereafter.
W. The interest rate for this Revenue Bond is 8.6% through August 1, 2002 and
7.6% thereafter.
X. The interest rate for this Revenue Bond is 7.9% through November 1, 2002
and 7.4% thereafter.
Y. The interest rate for this Revenue Bond is 8.5% through November 1, 2002
and 7.6% thereafter.
Z. The interest rate for this Revenue Bond is 7.9% through December 1, 2002
and 7.4% thereafter.
AA. The interest rate for this Revenue Bond is 8.5% through January 1, 2003 and
7.5% thereafter.
BB. The interest rate for this Revenue Bond is 7.9% through March 1, 2003 and
7.0% thereafter.
CC. The interest rate for this Revenue Bond is 8.6% through August 1, 2002 and
7.6% thereafter.
DD. The interest rate for this Revenue Bond is 8.1% through November 1, 2003
and 7.7% thereafter.
EE. The interest rate for this Revenue Bond is 7.9% through October 1, 2002 and
7.4% thereafter.
FF. The interest rate for this Revenue Bond is 7.75% through February 1, 2003
and 7.25% thereafter.
GG. The interest rate for this Revenue Bond is 8.0% through March 1, 2003 and
7.5% thereafter.
HH. The interest rate for this Revenue Bond is 7.9% through March 1, 2003 and
7.0% thereafter.
II. The interest rate for this Revenue Bond is 8.5% through September 1, 2002
and 7.65% thereafter.
JJ. The interest rate for this Revenue Bond is 7.75% through November 1, 2002
and 6.95% thereafter.
KK. The interest rate for this Revenue Bond is 8.4% through January 1, 2003 and
7.4% thereafter.
LL. The interest rate for this Revenue Bond is 8.4% through December 1, 2002
and 7.4% thereafter.
MM. The interest rate for this Revenue Bond is 7.7% through December 1, 2003
and 7.2% thereafter.
NN. The interest rate for this Revenue Bond is 7.5% through April 1, 2003 and
7.0% thereafter.
OO. The interest rate for this Revenue Bond is 8.45% through October 1, 2002
and 7.45% thereafter.
PP. The interest rate for this Revenue Bond is 8.0% through September 1, 2002
and 7.2% thereafter.
QQ. The interest rate for this Revenue Bond is 7.75% through April 1, 2003 and
7.7% thereafter.
RR. The interest rate for this Revenue Bond is 7.8% through November 1, 2002
and 7.5% thereafter.
SS. The interest rate for this Revenue Bond is 9.75% through November 1, 2002
and 9.25% thereafter.

15

ACCESSING MULTIPLE FORMS OF CAPITAL

In order for the Company to fund its investments in Revenue Bonds and facilitate
growth, the Company will need to continue to access additional capital. The
Company uses a combination of equity offerings and securitizations of its assets
in order to finance additional investments in Revenue Bonds. The Company's
diverse access to capital provides financial flexibility and enables the Company
to not have to rely on one single source of debt or equity. Further, the
particular structure of each capital source has attributes that may make it more
accommodating to certain investors or more favorably received in the then
current climate of the capital markets.

The Company has primarily used two sources of capital: collateralized debt
securitizations and equity offerings. The most efficient and economical source
of capital is securitization. The Company has two primary securitization
programs: the Private Label Tender Option Program ("TOP") and the
P-FLOATS/RITES-SM- program. Securitizations continue to offer the lowest cost of
capital, albeit with certain covenants and leverage limits. Pursuant to its
Trust Agreement, the Company is only able to incur leverage or other financing
up to 50% of the Company's Total Market Value; this leverage restriction is
generally consistent or more conservative than leverage covenants on the
Company' s securitized debt. The Company's conservative capital structure
therefore requires periodic equity offerings to maintain leverage within
required limits.

During 2001, the Company's growth was financed by the Private Label Tender
Option Program, new common share public offerings, preferred share offerings by
a subsidiary, and securitization transactions as well as funds generated from
operations in excess of distributions. The Company's continued growth is
expected to be financed by new issuances of Common Shares, the TOP or similar
programs, additional securitization transactions and funds generated from
operations in excess of distributions. During 2002, the Company expects to raise
funds through additional common share, preferred share and Convertible Community
Reinvestment Act Preferred Share offerings ("Convertible CRA Shares"); however,
there can be no assurance that these initiatives will be successful.

PUBLIC OFFERINGS

On February 21, 2002, the Company sold to the public 6.3 million Common Shares
at a price of $15.47 per share. The net proceeds from this offering,
approximating $92.5 million, will be used primarily to fund additional
investments in Revenue Bonds and for general corporate purposes.

On November 8, 2001, the Company sold to the public 3.7 million Common Shares at
a price of $15.00 per share. The net proceeds from this offering, approximating
$51.8 million, were used to fund additional investments in Revenue Bonds and for
general corporate purposes.

On May 10, 2001, the Company sold to the public 8.4 million Common Shares at a
price of $14.64 per share. The net proceeds from this offering, approximating
$115.7 million, were used to fund additional investments in Revenue Bonds,
reduce outstanding debt and for general corporate purposes.

PREFERRED EQUITY ISSUANCES

One of CharterMac's subsidiaries, Equity Issuer, has issued preferred shares to
institutional investors with an aggregate liquidation amount of approximately
$218.5 million, issued as follows: $90.0 million in 1999, $79.0 million in 2000
and $49.5 million in 2001. The Cumulative Preferred Shares are not convertible
into Common Shares of Equity Issuer or the Company's Common Shares. The
Cumulative Preferred Shares have an annual preferred dividend payable quarterly
in arrears, but only upon declaration thereof by Equity Issuer's board of
trustees and only to the extent of Equity Issuer's tax-exempt income (net of
expenses) for the particular quarter. Since inception, all quarterly
distributions have been declared at the stated annualized dividend rate for each
respective series and all distributions so declared have been paid. See Item 5,
"Market for the Company's Common Shares and Related Shareholder Matters" for
more detailed information.

PRIVATE LABEL TENDER OPTION PROGRAM

On May 21, 1998, the Company closed on its Private Label Tender Option Program
("TOP") in order to raise additional capital to acquire additional Revenue
Bonds. As of December 31, 1999, the maximum amount of capital that could be
raised under the TOP was $400 million. On December 7, 2000, the Company refined
the structure the TOP for the primary purpose of segregating Revenue Bonds
issued by governmental entities in California from the remainder of the Revenue
Bonds under the TOP and to increase the maximum amount of capital available
under the program to $500 million.

As of December 31, 2001, the Company has contributed 64 issues of Revenue Bonds
in the aggregate par amount of approximately $578 million to CharterMac
Origination Trust I (the "Origination Trust"), a wholly-owned, indirect
subsidiary of the Company. The Origination Trust then contributed 47 of its
Revenue Bonds, with an aggregate par amount of approximately $428 million, to
CharterMac Owner Trust I (the "Owner Trust") which is controlled by the Company.
The Owner Trust contributes selected bonds to specific "Series Trusts" in order
to segregate Revenue Bonds issued by governmental entities selected by state of
origin. As of December 31, 2001, four such Series Trusts were created: two
"California only" series that had 17 issues of Revenue Bonds in the aggregate
par amount of approximately $123 million and two "National" (non-state specific)
series that had 37 issues of Revenue Bonds in the aggregate par amount of
approximately $319 million.

Each Series Trust issues two equity certificates: (i) a Senior Certificate,
which has been deposited into another Delaware business trust (a "Certificate
Trust") which issues and sells "Floater Certificates" representing proportional
interests in the Senior Certificate to new investors and (ii) a Residual
Certificate representing the remaining beneficial ownership interest in each
Series Trust, which

16

has been issued to the Origination Trust. At December 31, 2001, the
California only and National Series Trusts had Floater Certificates with an
outstanding amount of $70 million and $205 million, respectively.

The Revenue Bonds remaining in the Origination Trust (aggregate principal
amount of approximately $150 million) are additional collateral for the Owner
Trust's obligations under the Senior Certificate. In addition, the Owner
Trust obtained a municipal bond insurance policy from MBIA to credit enhance
Certificate distributions for the benefit of the holders of the Floater
Certificates and arranged for a liquidity facility, issued by a consortium of
highly rated European banks, with respect to the Floater Certificates. The
Company owns no beneficial interest in and does not control the Certificate
Trusts.

The effect of the TOP structure is that a portion of the interest received by
the Owner Trust on the Revenue Bonds it holds is distributed through the
Senior Certificate to the holders of the Floater Certificates with the
residual interest remitted to the Origination Trust (and thus to the benefit
of the Company) via the Residual Certificate. The effect of the December 7,
2000, refinement of the TOP structure was to segregate the California related
Floater Certificates as they generally will pay distributions at lower rates
than National (non-state specific) Floater Certificates and thus the yield on
the Residual Certificates owned by the Origination Trust is increased.

The Company's cost of funds relating to the TOP (calculated as interest
expense plus recurring fees as a percentage of the weighted average amount of
the outstanding Senior Certificate) was approximately 3.5%, 5.4% and 4.5% for
the years ended December 31, 2001, 2000 and 1999, respectively.

P-FLOATS/RITES

Another source of financing for the Company's investments is the
securitization of selected Revenue Bonds through the Merrill Lynch Pierce
Fenner & Smith Incorporated ("Merrill Lynch") P-FLOATS/RITES program. Merrill
Lynch deposits each Revenue Bond into an individual special purpose trust
together with a Credit Enhancement Guarantee ("Guarantee"). Two types of
securities are then issued by each trust, (1) Puttable Floating Option
Tax-Exempt Receipts ("P-FLOATS"), a short-term senior security which bears
interest at a floating rate that is reset weekly and (2) Residual Interest
Tax Exempt Securities ("RITES"), a subordinate security which receives the
residual interest payment after payment of P-FLOAT interest and ongoing
transaction fees. The P-FLOATS are sold to qualified third party, tax-exempt
investors and the RITES are generally sold back to the Company. The Company
has the right, with 14 days notice to the trustee, to purchase the
outstanding P-FLOATS and to withdraw the underlying Revenue Bonds from the
trust. When the Revenue Bonds are deposited into the P-FLOAT Trust, the
Company receives the proceeds from the sale of the P-FLOATS less certain
transaction costs. In certain other cases, Merrill Lynch may directly buy the
Revenue Bonds from local issuers, deposit them in the trust, sell the P-FLOAT
security to qualified investors and then sell the RITES to the Company.

In order to facilitate the securitization under the P-FLOATS program, the
Company has pledged certain additional Revenue Bonds, cash and cash
equivalents and temporary investments as collateral for the benefit of the
credit enhancer or liquidity provider. At December 31, 2001, the total par
amount of such additional Revenue Bonds, cash and cash equivalents and
temporary investments pledged as collateral was approximately $148 million.

During the year 2001, the Company transferred 13 Revenue Bonds with an
aggregate par amount of approximately $142 million to the P-FLOATS/RITES
program and received proceeds of approximately $135 million. Additionally,
the Company repurchased five Revenue Bonds with an aggregate par value of
approximately $55 million.

The Company's cost of funds relating to its secured borrowings under the
Merrill Lynch P-FLOATS/RITES program (calculated as interest expense as a
percentage of the weighted average amount of the secured borrowings) was
approximately 3.72%, 4.96% and 4.8%, for the years ended December 31, 2001
and for the period June 29, 1999 (inception of this program) through December
31, 1999, respectively.

OTHER DEBT

In December 2001, CM Corp. acquired of 80% of PWF common stock for
approximately $34.9 million, of which, approximately $21.6 million was
financed and $7.6 million was paid in cash. Additionally, the Company repaid
a $5.7 million loan on behalf of PWF. The acquisition loan commitment ("PWF
Acquisition Loan") is $40 million, with an aggregate loan advance of up to
$30 million during the first three months, subject to a maximum advance ratio
of 80% of the value of PWF's mortgage servicing portfolio, following the PWF
acquisition and loan closing. At the time of closing, $27.3 million ("Initial
Advance") of the facility was drawn. CM Corp. may request a resizing of the
loan, up to the maximum facility size of $40 million, in order to generate
additional funding ("Final Advance") that may be required for the remaining
20% stock ownership of PWF. The Final Advance would equal the lesser of 100%
of the cost of the remaining 20% equity interests of PWF or an amount that
represents an overall maximum advance of 75% of the value of the PWF mortgage
servicing portfolio at the time of the Final Advance.

The PWF Acquisition Loan has a term of five years with an interest rate of
LIBOR plus 2.25%. The loan is interest only for the first twelve months.
Beginning in month thirteen and through the remaining loan term, quarterly
straight-line principal amortization on the Initial Advance is paid based on
a ten-year amortization period. Additionally, after receiving the Final
Advance, additional quarterly straight-line principal amortization payments
on the Final Advance will be made based on the remaining years of the
amortization period for the Initial Advance.

PWF has a $50 million multi-family revolving warehouse facility, which will
expire on May 31, 2002. At December 31, 2001, the facility was temporarily
increased to $160 million and had outstanding borrowings of $ 29.3 million at
an interest rate of 30-day LIBOR plus 1.00%, which resets daily, with a LIBOR
floor of 3%. At December 31, 2001, the interest rate was 4.0%. Borrowings

17

under the line of credit are collateralized by PWF's ownership interests in
the original mortgage notes. At December 31, 2001, PWF was in compliance with
all covenants of the facility.

PWF is the guarantor for a $35 million loan and security agreement for
Larson, which will expire on May 31, 2002. The interest rate for the
agreement is the lower of 30 day LIBOR plus 209 basis points or the 30 day
Treasury Bill rate plus 205 basis points. At December 31, 2001, there were no
outstanding borrowings under the agreement. At December 31, 2001, the Company
and Larson were in compliance with all covenants of the agreement.

PWF also has another $100 million secured, revolving mortgage warehouse
facility, subject to annual renewal during December of each year. CM Corp is
a guarantor of this warehouse facility. The interest rate for each warehouse
advance must be selected by the Company from the following two alternatives:
LIBOR (for the estimated duration of the advance) plus 125 basis points or
Prime plus 12.5 basis points (the default rate). At December 31, 2001 there
were no outstanding borrowings under the facility. At December 31, 2001, the
Company was in compliance with all covenants of the facility.

ATEBT MERGER

On November 2, 1999, the Company and American Tax Exempt Bond Trust
("ATEBT"), whose manager was an affiliate of the Manager of the Company,
entered into an Agreement and Plan of Merger providing for the merger of
ATEBT into and with the Company as the surviving trust in the merger (the
"ATEBT Merger"). The ATEBT Merger was approved by the ATEBT shareholders on
September 27, 2000 and consummated on November 14, 2000.

On the ATEBT Merger consummation date, ATEBT had total assets of
approximately $29,700,000 and net assets of approximately $28,300,000. ATEBT
had four tax-exempt first mortgage bonds financing properties in four states,
with an aggregate outstanding face amount of $23,775,000, and with individual
interest rates of 9.0%.

Pursuant to the Merger Agreement, each share of beneficial ownership in ATEBT
issued and outstanding was converted into 1.43112 Common Shares of the
Company. Following the ATEBT Merger, previous ATEBT shareholders own
2,115,722 Common Shares (representing approximately 9.3% of the outstanding
Common Shares at the time of the merger) of the Company.

COMPETITION

The Company, from time to time, may be in competition with private investors,
mortgage banking companies, lending institutions, quasi-governmental agencies
such as Fannie Mae and FHA, trust funds, mutual funds, domestic and foreign
credit enhancers, bond insurers, investment partnerships and other entities
with objectives similar to the Company. Although the Company operates in a
competitive environment, competitors focused on providing tax-exempt
financing on multifamily housing consistent with the Company's
custom-designed programs are relatively few.

The Company's business is also affected by competition to the extent that the
Underlying Properties from which it derives interest and, ultimately,
principal payments may be subject to competition relating to rental rates and
relative levels of amenities from those offered by comparable neighboring
properties. See the comprehensive table under the heading "Revenue Bonds -
Characteristics", above, for additional competitive information.

In addition, the Company is also in competition with 26 licensed DUS lenders
which originate multifamily mortgages on behalf of Fannie Mae. However, the
Company, through PWF, is better positioned to offer a full range of financing
programs on both affordable and market-rate multifamily housing. PWF's
origination groups are able to cross market the Company's tax-exempt Revenue
Bonds and Related Capital's Low Income Tax Credit equity with its loan
products, thereby offering developers a single, streamlined execution.

The Manager and/or its affiliates have formed, and may continue to form,
various entities to engage in businesses that may be competitive with the
Company. However, the Company's relationship with the Manager and its
affiliates offers developers different products for all their financing
needs, including pre-development loans, bridge loans and federal Low Income
Tax Credit Equity. These "Capital Solutions" enable developers to have a
single, streamlined process, which reduces the time and cost of financing. As
a result, the savings in time and up-front costs and the certainty of
execution that the Company offers developers enables the Company to receive
above-market rates of interest on our Revenue Bonds.

EMPLOYEES

CharterMac and each of its subsidiaries have entered into separate management
agreements with Related Charter L.P. and/or CM Corp. pursuant to which they
provide each respective entity with investment advice, portfolio management,
and all other services vital to such entity's operations.

Prior to the acquisition of PWF in December 2001, the Company had no
employees. PWF operates as a stand-alone entity and is actively self-managed
with its own employees. Thus on a consolidated basis, the Company had 145
employees as of December 31, 2001. These employees are not a party to any
collective bargaining agreement.

REGULATORY MATTERS

Neither CharterMac nor its subsidiaries are registered under the Investment
Company Act of 1940, as amended (the "Investment Company Act"). The Company
would not be able to conduct its activities as it currently conducts them if
it was required to register.

18

CharterMac at all times intends to conduct its, and those of its
subsidiaries' activities, so as not to become regulated as an "investment
company" under the Investment Company Act. While CharterMac is not an
"investment company" under the Investment Company Act, if one of CharterMac's
subsidiaries were deemed to be an "investment company," CharterMac could also
be subject to regulation under the Investment Company Act. There are a number
of exemptions from registration under the Investment Company Act that
CharterMac believes applies to it and its subsidiaries, and which CharterMac
believes make it possible for the Company not to be subject to registration
under the Investment Company Act.

RECENT LEGISLATION

The States of California and Florida recently adopted administrative
amendments to their allocation plans pursuant to which they award bond value
capital to developers of multifamily housing. These amendments will require,
in some cases, that a certain portion of the debt financing for such
properties to be taxable. Therefore, in certain cases, the Company may be
required to offer taxable financing to California and Florida developers in
order to be competitive.

Since 1986, the Internal Revenue Code has provided that any Revenue Bond
which is a "private activity bond" (other than certain refunding bonds and
bonds issued for Section 501(c)(3) organizations) must receive an allocation
of "volume cap" from the governmental issuer of the bond. The amount of
volume cap was established in 1986 and was not indexed for inflation. Thus,
the amount of available volume cap in real dollars has decreased each year,
reducing the number of projects that may be financed with private activity
bonds. On December 21, 2000, President Clinton signed into law an omnibus
funding bill (H.R. 4577) containing $31.5 billion in tax cuts. Included in
the law are provisions increasing both the low-income housing tax credit and
tax exempt bond volume caps over a two year period as follows: (i) the tax
credit cap has been increased to $1.50 per capita in 2001 and will be $1.75
per capita in 2002; (ii) the bond volume cap has been increased to the
greater of $62.50 per resident or $187.5 million in 2001 and will be $75 per
resident or $225 million in 2002. Both volume caps are indexed for inflation
beginning in 2003.

Item 2. Properties

The Company leases office space as follows:

Mineola, New York. In 1997, PWF entered into a 10 year, 2 month lease for
an office facility. The lease expires in 2007.

Bernardsville, New Jersey. In 1999, Larson entered into a 5 year lease for
an office facility. The lease expires in 2004.

Dallas, Texas. In 2000, PWF entered into a 5 year lease for an office
facility. The lease expires in 2005.

The Manager leases office space located at 625 Madison Avenue, New York, New
York, 10022.

The Company and the Manager believe that these facilities are suitable for
current requirements and contemplated future operations.

Item 3. Legal Proceedings

The Company is subject to routine litigation and administrative proceedings
arising in the ordinary course of business. Management does not believe that
such matters will have a material adverse impact on the Company's financial
position, results of operations or cash flows.

Item 4. Submission of Matters to a Vote of Shareholders

None.

19

PART II

Item 5. Market for the Company's Common Shares and Related Shareholder Matters.

As of March 20, 2002, there were 3.551 registered shareholders owning 41,152,738
Common Shares. The Company's Common Shares have been listed on the American
Stock Exchange since October 1, 1997 under the symbol "CHC". Prior to October 1,
1997, there was no established public trading market for the Company's Common
Shares.

The high and low prices for each quarterly period of the last two years during
which the Common Shares were traded are as follows:

The last reported sale price of Common Shares on the American Stock Exchange
on March 20, 2002 was $16.03.

INCENTIVE SHARE OPTION PLAN

The Company has adopted an incentive share option plan (the "Incentive Share
Option Plan"), the purpose of which is to (i) permit the Company and the
Manager to attract and retain qualified persons as trustees and officers and
(ii) to provide incentive and to more closely align the financial interests
of the Manager and its employees and officers with the interests of the
shareholders by providing the Manager with substantial financial interest in
the Company's success. The Compensation Committee administers the Incentive
Share Option Plan. Pursuant to the Incentive Share Option Plan, if the
Company's distributions per Common Share in the immediately preceding
calendar year exceed $0.9517 per Common Share, the Compensation Committee has
the authority to issue options to purchase, in the aggregate, that number of
Common Shares which is equal to three percent of the Common Shares
outstanding as of December 31 of the immediately preceding calendar year,
provided that the Compensation Committee may only issue, in the aggregate,
options to purchase a maximum number of Common Shares over the life of the
Incentive Share Option Plan equal to 10% of the Common Shares outstanding on