UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

COMMISSION FILE NUMBER: 0-18431

Inland Land Appreciation Fund, L.P.

 (Exact name of registrant as specified in its charter)

2901 Butterfield Road, Oak Brook, IL  60523

(Address of principal executive offices)(Zip Code)

630-218-8000

 (Registrant’s telephone number, including area code)

___________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days.

Yes X     No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of "large accelerated filer," "accelerated filer" and "smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  o         Accelerated filer  o          Non-accelerated filer o           Smaller reporting company X

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o     No  X

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INLAND LAND APPRECIATION FUND, L.P.

(a limited partnership)

Balance Sheets

September 30, 2009 and December 31, 2008

(unaudited)

Assets

See accompanying notes to financial statements.

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INLAND LAND APPRECIATION FUND, L.P.

(a limited partnership)

Balance Sheets

(continued)

September 30, 2009 and December 31, 2008

(unaudited)

Liabilities and Partners' Capital

See accompanying notes to financial statements.

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INLAND LAND APPRECIATION FUND, L.P.

(a limited partnership)

Statements of Operations

For the three and nine months ended September 30, 2009 and 2008

(unaudited)

See accompanying notes to financial statements.

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 INLAND LAND APPRECIATION FUND, L.P.

(a limited partnership)

Statements of Cash Flows

For the nine months ended September 30, 2009 and 2008

(unaudited)

See accompanying notes to financial statements.

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INLAND LAND APPRECIATION FUND, L.P.

(a limited partnership)

Notes to Financial Statements

September 30, 2009

(unaudited)

Readers of this quarterly report should refer to the Partnership's audited financial statements for the fiscal year ended December 31, 2008 which are included in the Partnership's 2008 annual report, as certain footnote disclosures which would substantially duplicate those contained in such audited financial statements have been omitted from this report.

(1) Organization and Basis of Accounting

The Registrant, Inland Land Appreciation Fund, L.P. (the "Partnership") is a limited partnership formed in October 1987, pursuant to the Delaware Revised Uniform Limited Partnership Act, to invest in undeveloped land on an all-cash basis and realize appreciation of such land upon resale.  On October 12, 1988, the Partnership commenced an Offering of 10,000 (subject to increase to 30,000) Limited Partnership Units ("Units") pursuant to a Registration Statement on Form S-11 under the Securities Act of 1933.  Inland Real Estate Investment Corporation is the General Partner.  The Offering terminated on October 6, 1989, with total sales of 30,000 Units, at $1,000 per Unit, not including the General Partner or the Initial Limited Partner.  All of the holders of these Units were admitted to this Partnership.  The Limited Partners of the Partnership share in their portion of benefits of ownership of the Partnership's real property investments according to the number of Units held.  As of September 30, 2009, the Partnership has repurchased a total of 407.75 Units for $359,484 from various Limited Partners through the Unit Repurchase Program.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  

In the opinion of management, the financial statements contain all the adjustments necessary to present fairly the financial position and results of operations for the periods presented herein.  Results of interim periods are not necessarily indicative of results to be expected for the year.

The Partnership considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents and are carried at cost, which approximates market.  As of September 30, 2009, the Partnership’s cash and cash equivalents are fully covered by the U.S. Government’s Temporary Liquidity Guarantee Program which provides unlimited deposit insurance coverage through December 31, 2009.

The Partnership recognizes income from the sale of land parcels in accordance with the full accrual method of accounting.

The Partnership's escrow agent holds earnest money deposits for the sale of parcels.  Generally, these funds are not the Partnership's until the closing has occurred or the buyer under the sale agreement has committed a default which would entitle the Partnership to the earnest money.

Except as described in footnote (b) to Note 3 of these notes, the Partnership uses the area method of allocation, which approximates the relative sales method of allocation, whereby a per acre price is used as the standard allocation method for land purchases and sales.  The total cost of the parcel is divided by the total number of acres to arrive at a per acre price.

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INLAND LAND APPRECIATION FUND, L.P.

(a limited partnership)

Notes to Financial Statements

(continued)

September 30, 2009

(unaudited)

New Accounting Pronouncements

In May 2008, an accounting pronouncement was issued which identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles.  This pronouncement becomes effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.”  The Partnership does not expect this pronouncement to have a material impact on our financial statements.

On September 30, 2009, the Partnership adopted changes issued by the Financial Accounting Standards Board (FASB) to the authoritative hierarchy of GAAP.  These changes establish the FASB Accounting Standards Codification (Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP.  Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.  The FASB will no longer issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead the FASB will issue Accounting Standards Updates.  Accounting Standards Updates will not be authoritative in their own right as they will only serve to update the Codification.  These changes and the Codification itself do not change GAAP.  Other than the manner in which new accounting guidance is referenced, the adoption of these changes had no impact on our financial statements.

(2) Transactions with Affiliates

The General Partner and its affiliates are entitled to reimbursement for salaries and expenses of employees of the General Partner and its affiliates relating to the administration of the Partnership.  Such costs of $36,511 and $50,558 have been incurred and are included in professional services to affiliates and general and administrative expenses to affiliates for the nine months ended September 30, 2009 and 2008, respectively, of which $8,013 and $11,727 was unpaid at September 30, 2009 and December 31, 2008, respectively.

An affiliate of the General Partner performed marketing and advertising services for the Partnership and was reimbursed (as set forth under terms of the Partnership Agreement) for direct costs.  Such costs of $4,394 and $25,142 have been incurred and are included in marketing expenses to affiliates for the nine months ended September 30, 2009 and 2008, respectively, of which $150 and $500 was unpaid at September 30, 2009 and December 31, 2008, respectively.

An affiliate of the General Partner performed property upgrades, rezoning, annexation and other activities to prepare the Partnership's investment properties for sale and was reimbursed (as set forth under terms of the Partnership Agreement) for salaries and direct costs.  For the nine months ended September 30, 2009 and 2008, the Partnership incurred $0 and $77,783, respectively, of such costs.  The affiliate did not recognize a profit on any project.  Such costs are included in investment properties, of which $0 and $1,400 was unpaid at September 30, 2009 and December 31, 2008, respectively.

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INLAND LAND APPRECIATION FUND, L.P.

(a limited partnership)

Notes to Financial Statements

(continued)

September 30, 2009

(unaudited)

(3)  Investment properties

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INLAND LAND APPRECIATION FUND, L.P.

(a limited partnership)

Notes to Financial Statements

(continued)

September 30, 2009

(unaudited)

(3)  Investment properties (continued)

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INLAND LAND APPRECIATION FUND, L.P.

(a limited partnership)

Notes to Financial Statements

(continued)

September 30, 2009

(unaudited)

(3)  Investment properties (continued)

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INLAND LAND APPRECIATION FUND, L.P.

(a limited partnership)

Notes to Financial Statements

(continued)

September 30, 2009

(unaudited)

(3) Investment properties (continued)

(a)

Included in the purchase agreement of Parcel 5 was a condition that required the Partnership to buy an option to purchase an additional 243 acres immediately to the west of this parcel.  The 1990 sale transaction relates to the sale of this option.

(b)

The Partnership purchased from two third parties, two sets of three contiguous parcels of land (Parcels 6, 7 and 8; and Parcels 9, 10 and 11).  The General Partner believes that the total value of this land will be maximized if it is treated and marketed to buyers as six separate parcels and closed the transactions as six separate purchases to facilitate this.  Parcels 6, 7 and 8 will be treated as one parcel and Parcels 9, 10 and 11 will be treated as one parcel for purposes of computing Parcel Capital (as defined in the Partnership Agreement) and distributions to the partners.

(c)

Reconciliation of investment properties owned:

(d)

On a quarterly basis, the Partnership reviews impairment indicators and if necessary, conducts an impairment analysis to ensure that the carrying value of each investment property does not exceed its estimated fair value.  If this were to occur, the Partnership would be required to record an impairment loss equal to the excess of the carrying value over the estimated fair value.

In determining the value of an investment property and whether the property is impaired, management considers several indicators which require difficult, complex and/or subjective judgments, such as projected sales prices, capital expenditures and assessment of current economic conditions.  The aforementioned indicators are considered by management in determining the value of any particular property.  The value of any particular property is sensitive to the actual results of any of these uncertain indicators, either individually or taken as a whole.  Should the actual results differ from management's judgment, the valuation could be negatively or positively affected.

The valuation and possible subsequent impairment of investment properties is a significant estimate that can and does change based on management's continuous process of analyzing each property.  For the nine months ended September 30, 2009 and 2008, the Partnership had recorded no such impairment.

(4) Rental Income

The Partnership has determined that all leases relating to the farm parcels are operating leases.  Accordingly, rental income is reported when earned.

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INLAND LAND APPRECIATION FUND, L.P.

(a limited partnership)

Notes to Financial Statements

(continued)

September 30, 2009

(unaudited)

As of September 30, 2009, the Partnership had farm leases of generally one year in duration, for approximately 911 acres of the approximately 1,004 acres owned.

(5) Mortgage Loan Receivable

The mortgage loan receivable is the result of sales of parcels, in whole or in part.  The Partnership has recorded a deferred gain on these sales.  The deferred gain will be recognized over the life of the related mortgage loan receivable as principal payments are received.  As of September 30, 2009, the mortgage loan receivable and the related deferred gain are fully reserved.

The General Partner determined that the maximum value of Parcel 1 could be realized if the parcel was developed and sold as individual lots.  However, if we had followed that plan, there is a possibility that the limited partners may have been subject to unrelated business taxable income.  Therefore, the Partnership sold the parcel to a third party developer whereby 100% of the sales price was represented by notes receivable from the buyer.  The transaction was deemed an installment sale.  After the sale, the developer, through a limited liability company (“LLC”), secured third party financing to cover the deferred down payment owed to the Partnership as well as provide proceeds to begin the development of the project.  The sale was structured so that the down payment received at the time of the sale was sufficient to provide a distribution to the Limited Partners that equated to the parcel capital allocated to the parcel plus approximately a 6% return per annum on the parcel capital through the date of the distribution.

The velocity of the developer's individual lot sales was slower than originally projected and consequently the developer's carrying costs were higher.  The developer obtained a loan from an affiliate of our General Partner.  These funds were used for operating costs and to continue the development of the project.  As a result of the slower lot sales, the net sale proceeds available to us were lower than anticipated.  We continued to review the project and determined that the collectability of the receivable was doubtful.  As a result, we elected to reserve $1,233,175 of principal and $423,794 of accrued interest relating to the mortgage receivable.  The deferred gain of $60,752 relating to the mortgage loan receivable was also reserved and recorded against bad debt expense.

The General Partner guaranteed the third party development loan owed by the LLC.  In reviewing the development’s financial situation, the General Partner determined that it would be in its best interest to have an affiliate acquire the interest in the LLC.  The General Partner and its affiliates concluded that they could better control the continuing costs to complete the development and would therefore have the best opportunity to limit their exposure under the guarantee agreements and possibly recover a portion of the amount owed to the Partnership.  An affiliate of the General Partner acquired the interests in the LLC and paid off the debt under its guarantee of the LLC loans.  The affiliate of the General Partner will complete the development and the sale of the project.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Certain statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this quarterly report on Form 10-Q constitute “forward-looking statements" within the meaning of the Federal Private Securities Litigation Reform Act of 1995.  These forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by these forward-looking statements.  These factors include, among other things, adverse changes in real estate, financing and general economic or local conditions; the ability to obtain annexation and zoning approvals required to develop our properties; the approval of local governing bodies to develop our properties; successful lobbying of local "no growth" or limited development homeowner groups; eminent domain proceedings; changes in the environmental conditions or changes in the environmental positions of governmental bodies; and potential conflicts of interest between us and our affiliates, including our general partner.

We electronically file our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports with the Securities and Exchange Commission (SEC).  The public may read and copy any of the reports that are filed with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549.  The public may obtain information on the operation of the Public Reference Room by calling the SEC at (800)-SEC-0330.  The SEC maintains an Internet site at (www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically.

Critical Accounting Policies

The Securities and Exchange Commission previously issued Financial Reporting Release or FRR No. 60 "Cautionary Advice Regarding Disclosure About Critical Accounting Policies."  A critical accounting policy is one that would materially affect our operations or financial condition, and requires management to make estimates or judgments in certain circumstances.  We believe that our most critical accounting policies relate to how we value our investment properties and mortgage loans receivable and revenue recognition.  These judgments often result from the need to make estimates about the effect of matters that are inherently uncertain.  The purpose of the FRR is to provide investors with an understanding of how management forms these policies.  Critical accounting policies discussed in this section are not to be confused with accounting principles and methods disclosed in accordance with accounting principles generally accepted in the United States of America or GAAP.  GAAP requires information in financial statements about accounting principles, methods used and disclosures pertaining to significant estimates.  The following disclosure discusses judgments known to management pertaining to trends, events or uncertainties known which were taken into consideration upon the application of those policies and the likelihood that materially different amounts would be reported upon taking into consideration different conditions and assumptions.

Valuation of Investment Properties - On a quarterly basis, we review impairment indicators and if necessary, conduct an impairment analysis to ensure that the carrying value of each investment property does not exceed its estimated fair value.  If an  investment property is considered impaired, we would be required to record an impairment loss equal to the excess of carrying value over the estimated fair value.

In determining the value of an investment property and whether the property is impaired, management considers several indicators which require difficult, complex and/or subjective judgments, such as projected sales prices, capital expenditures and assessment of current economic conditions.  The aforementioned indicators are considered by management in determining the value of any particular property.  The value of any particular property is sensitive to the actual results of any of these uncertain indicators, either individually or taken as a whole.  Should the actual results differ from management's judgment, the valuation could be negatively or positively affected.

The valuation and possible subsequent impairment of investment properties is a significant estimate that can and does change based on management's continuous process of analyzing each property.  For the nine months ended September 30, 2009, we have not recorded any such impairment.

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Cost Allocation – Generally, we use the area method of cost allocation, which approximates the relative sales method of cost allocation, whereby a per acre price is used as the standard allocation method for land purchases and sales.  The total cost of the parcel is divided by the total number of acres to arrive at a per acre price.

Valuation of Mortgage Loans Receivable - On a quarterly basis, we conduct an analysis to ensure that the carrying value of each mortgage loan receivable is recoverable from the borrower.  If we determine that all or a portion of the receivable is not collectible, we would be required to record an allowance for doubtful accounts equal to the amount estimated to be uncollectible.

In determining the value of mortgage loans receivable, management considers projected sales proceeds available and expenses related to the property associated with the mortgage.  Should the actual results differ from management's judgment, the valuation could be negatively or positively affected.

The valuation and possible subsequent allowance for doubtful accounts is a significant estimate that can and does change based on management's continuous process of analyzing each mortgage loan receivable.  As of September 30, 2009, we have an allowance for doubtful accounts of $1,233,175 and $423,794 on the remaining mortgage loan receivable and accrued interest receivable, respectively.

Assets Held for Sale - In determining whether to classify an asset as held for sale, we consider whether: (i) management has committed to a plan to sell the asset; (ii) the asset is available for immediate sale, in its present condition; (iii) we have initiated a program to locate a buyer; (iv) we believe that the sale of the asset is probable; (v) we are actively marketing the asset for sale at a price that is reasonable in relation to its current value; and (vi) actions required for us to complete the plan indicate that it is unlikely that any significant changes will be made to the plan.

If all of the above criteria are met, we classify the asset as held for sale.  The assets and liabilities associated with those assets that are held for sale are classified separately on the balance sheets for the most recent reporting period.  Additionally, the operations for the periods presented are classified on the statements of operations as discontinued operations for all periods presented.

From time to time, we may determine that a “held for sale property” no longer meets the criteria to continue to be classified as held for sale.  If this occurs, we record the property at the lower of the carrying amount before the property was classified as held for sale or the fair value at the decision date not to sell.  As of September 30, 2009, we have not classified any properties as held for sale.

Liquidity and Capital Resources

On October 12, 1988, we commenced an offering of 10,000 (subject to increase to 30,000) limited partnership units or units pursuant to a Registration Statement on Form S-11 under the Securities Act of 1933.  On October 6, 1989, the offering terminated after we had sold 30,000 units to the public at $1,000 per unit resulting in $30,000,000 in gross offering proceeds, which does not include proceeds from the initial limited partner and the general partner.  All of the holders of our units were admitted to our partnership.  Our limited partners share in their portion of benefits of ownership of our real property investments according to the number of units held.

We used $25,187,069 of gross offering proceeds to purchase on an all-cash basis twenty-five parcels of undeveloped land and an option to purchase undeveloped land.  These investments include the payment of the purchase price, acquisition fees and acquisition costs of such properties.  Fourteen of the parcels were purchased during 1989 and eleven during 1990.  As of September 30, 2009, we have had multiple sales transactions, through which we have disposed of approximately 2,098 acres of the approximately 3,102 acres originally owned.  As of September 30, 2009, cumulative distributions to the limited partners have totaled $38,674,493 (which exceeds the original capital) and $4,745,451 to the general partner.  Through September 30, 2009, we have used $20,294,134 of working capital for rezoning and other activities.  Such amounts have been capitalized and are included in investment properties.

Our capital needs and resources will vary depending upon a number of factors, including the extent to which we conduct rezoning and other activities relating to utility access, the installation of roads, subdivision and/or annexation of land to a municipality, changes in real estate taxes affecting our land, and the amount of revenue received from

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leasing.  As of September 30, 2009, we own, in whole or in part, nine of our twenty-five original parcels, the majority of which are leased to local farmers and are generating sufficient cash flow from farm leases to cover property taxes and insurance.

At September 30, 2009, we had cash and cash equivalents of $1,889,086, which is available to be used for our costs and liabilities, cash distributions to partners and other activities with respect to some or all of our land parcels.

During the nine months ended September 30, 2009, there were no land sales.  Sale of investment property of $476,891 and cost of land sold of $142,238 for the nine months ended September 30, 2008 is the result of the sale of the remaining 5.8 acres of Parcel 7.  Undistributed net sales proceeds will be used to cover our operations, including property upgrades, and for distributions.  We will evaluate our cash needs throughout the year to determine future distributions.

We plan to enhance the value of our remaining land through pre-development activities such as rezoning, annexation and land planning.  We have already been successful in, or are in the process of, pre-development activity on several of our land investments.  Zoning discussions and land planning have progressed on Parcels 17, 18, 19 and 22.

We are closely monitoring the real estate market trends, especially within the areas where our remaining parcels are located.  Currently, the depressed real estate market, coupled with the turbulent financial markets, continue to adversely impact sales activity, especially sales of vacant land.  We realize it could take some time for these current trends to improve which could result in an even longer holding period.  However, we believe we have taken the steps necessary to reduce costs and maintain sufficient reserves of cash and cash equivalents to cover all our costs for an extended period of time.  We have been able to renew farm leases with our long time tenants which cover the costs of insurance and real estate taxes.  Our remaining land is not encumbered by debt and is located in areas that we believe are in the paths of future development.

Transactions with Related Parties

Our general partner and its affiliates are entitled to reimbursement for salaries and expenses of employees of the general partner and its affiliates relating to our administration.  Such costs of $36,511 and $50,558 have been incurred and are included in professional services to affiliates and general and administrative expenses to affiliates for the nine months ended September 30, 2009 and 2008, respectively, of which $8,013 and $11,727 was unpaid at September 30, 2009 and December 31, 2008, respectively.

An affiliate of our general partner performed marketing and advertising services for us and was reimbursed for direct costs.  Such costs of $4,394 and $25,142 have been incurred and are included in marketing expenses to affiliates for the nine months ended September 30, 2009 and 2008, respectively, of which $150 and $500 was unpaid at September 30, 2009 and December 31, 2008, respectively.

An affiliate of the general partner performed property upgrades, rezoning, annexation and other activities to prepare our investment properties for sale and was reimbursed for salaries and direct costs.  For the nine months ended September 30, 2009 and 2008, we incurred $0 and $77,783, respectively, of such costs.  The affiliate did not recognize a profit on any project.  Such costs are included in investment properties, of which $0 and $1,400 was unpaid at September 30, 2009 and December 31, 2008, respectively.

Results of Operations

As of September 30, 2009, we owned nine parcels of land consisting of approximately 1,004 acres.  Of the 1,004 acres owned, approximately 911 acres are leased to local farmers and generate sufficient cash flow to cover property taxes and insurance.  Rental income was $113,529 and $105,499 for the nine months ended September 30, 2009 and 2008, respectively.  Rental income increased due to an increase in the farm rental rates.  In addition, during the first four months of 2008, there was no farm lease for Parcel 22.

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There were no sales of land parcels for the nine months ended September 30, 2009.  Sale of investment property of $476,891 and cost of land sold of $142,238 for the nine months ended September 30, 2008 is the result of the sale of the remaining 5.8 acres of Parcel 7.

We have made progress in the land planning process for the three contiguous parcels 17, 18, and 22.  Parcels 17 and 18 are within the planning jurisdiction of the City of Woodstock.  Parcel 22 was forcibly annexed into the corporate limits of the Village of Bull Valley and subject to that village’s restrictions.  For land planning purposes, it was our intent to have most if not all three parcels annexed to the City of Woodstock.  We have entered into a Settlement and Annexation Agreement with the Village of Bull Valley which moves the boundary line favorably for us allowing us to proceed with the land planning for these parcels with the City of Woodstock.  The settlement with Bull Valley has the prospect of permitting us to develop the property with sewer and water facilities from the City of Woodstock and with a land use that could not have been developed in Bull Valley.  In consideration for the release of land, we conveyed approximately 51 acres of Parcel 22 to the Village of Bull Valley during 2008.  Also as part of the settlement, we received favorable zoning for the remaining land that lies within the limits of the Village of Bull Valley.

Professional services to affiliates were $31,011 and $43,522 for the nine months ended September 30, 2009 and 2008, respectively.  Professional services primarily include accounting and legal fees.  Professional services to affiliates decreased due to a decrease in accounting fees.  Professional services to non-affiliates were $56,420 and $44,360 for the nine months ended September 30, 2009 and 2008, respectively.  Professional services to non-affiliates increased primarily due to an increase in accounting fees for Sarbanes-Oxley related procedures.

General and administrative expenses to affiliates and non-affiliates were $23,991 and $30,614 for the nine months ended September 30, 2009 and 2008, respectively.  General and administrative expenses primarily include data processing costs, postage, and printing expenses.  General and administrative expenses to affiliates and non-affiliates decreased due primarily to a decrease in printing costs.

Marketing expenses to affiliates and non-affiliates were $4,394 and $40,017 for the nine months ended September 30, 2009 and 2008, respectively.  Marketing expenses to affiliates and non-affiliates are costs incurred for preparing and marketing parcels for sale.  The decrease for 2009 is due to less advertising costs and less marketing fees as a response to the slowdown in real estate sales.

Land operating expenses to non-affiliates were $15,118 and $34,791 for the nine months ended September 30, 2009 and 2008, respectively.  These costs primarily include real estate tax expense and insurance expense on the parcels we own.  The decrease is due primarily to a decrease in real estate tax expense as the result of a change in tax status for one of the parcels.

Interest income was $936 and $37,461 for the nine months ended September 30, 2009 and 2008, respectively.  Interest income is primarily a result of the cash available to invest on a short term basis during the year as a result of sales proceeds received.  The decrease for 2009 is due primarily to substantially lower interest rates and the decision to keep cash secure in non-interest bearing accounts which are covered by the U.S. Government’s Temporary Liquidity Guarantee Program.

Other income was $7,175 and $8,225 for the nine months ended September 30, 2009 and 2008, respectively.  The decrease in 2009 is due to less transfer fee income as a result of a reduced number of completed transfers.

We determined that the maximum value of Parcel 1 could be realized if the parcel was developed and sold as individual lots.  However, if we had followed that plan, there is a possibility that the limited partners may have been subject to unrelated business taxable income.  Therefore, we sold the parcel to a third party developer whereby 100% of the sales price was represented by notes receivable from the buyer.  The transaction was deemed an installment sale.  After the sale, the developer, through a limited liability company or LLC, secured third party financing to cover the deferred down payment owed to us as well as provide proceeds to begin the development of the project.  The sale was structured so that the deferred down payment received was sufficient to provide a distribution to our limited partners that equated to the invested capital allocated to the parcel (parcel capital) plus approximately a 6% return per annum on the parcel capital through the date of the distribution.

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The velocity of the developer's individual lot sales was slower than originally projected and consequently the developer's carrying costs were higher.  The developer obtained a loan from an affiliate of our general partner.  These funds were used for operating costs and to continue the development of the project.  As a result of the slower lot sales, the net sale proceeds available to us were lower than anticipated.  We continued to review the project and determined that the collectability of the receivable was doubtful.  As a result, we elected to reserve $1,233,175 of principal and $423,794 of accrued interest relating to the mortgage receivable.  The deferred gain of $60,752 relating to the mortgage loans receivable was also reserved and recorded against bad debt expense.

Our general partner guaranteed the third party development loan owed by the LLC.  In reviewing the development’s financial situation, our general partner determined that it would be in its best interest to have an affiliate acquire the interest in the LLC.  The general partner and its affiliates concluded that they could better control the continuing costs to complete the development and would therefore have the best opportunity to limit their exposure under the guarantee agreements and possibly recover a portion of the amount owed to us.  An affiliate of our general partner acquired the interest in the LLC and paid off the debt under its guarantee of the LLC loans.  The affiliate of the general partner will complete the development and sale of the project.  Based on our continuing review of development’s financial situation, we do not anticipate receiving any additional proceeds.  However, any write-off will not take place until such time as we are certain that no further proceeds will become available to reduce the amount of the receivable.  Our limited partners received distributions that equated to the parcel capital plus approximately a 6% return per annum on the parcel capital through the date of the distribution.

Other Items

In accordance with Article XVI Section 16.1 of the Inland Land Appreciation Fund, L.P. Partnership Agreement and Treasury Regulation Section 1.7704-1(j), we have not yet reached the maximum threshold of partnership units that may be transferred/assigned directly between parties during 2009.  Therefore, we may authorize additional sales of partnership units directly between parties during 2009.  We have a relationship with a “qualified matching service” as defined under Treasury Regulation Section 1.7704-1(g).  In accordance with this Treasury Regulation and the IRS private letter ruling obtained by the “qualified matching service”, we understand that additional partnership units may be transferred/assigned through the “qualified matching service” up to a separate maximum threshold each taxable year (in addition to the maximum threshold that may be transferred/assigned directly between parties discussed above).  However, there can be no assurance that the IRS private letter ruling will apply in this particular instance, or that any particular transfer will not violate the transfer restrictions contained in our partnership agreement or the provisions of Treasury Regulation Section 1.7704-1(g).  If you have any interest in participating in a transfer/assignment of partnership units through this “qualified matching service,” you can contact American Partnership Board directly at 800-736-9797.  You are strongly encouraged to consult your personal legal, financial and tax advisors in connection with any such transfer/assignment.

The Illinois Department of Revenue has finalized regulations regarding new Illinois income tax withholding requirements for nonresident partners.  The new withholding requirements are effective for the taxable years ending on or after December 31, 2008.  Payment of the required withholding amount of $4,567 was made to the Illinois Department of Revenue during March 2009.  We are also required to pay a withholding tax to the Internal Revenue Service with respect to a partner's allocable share of our taxable net income, if the partner is a foreign person.  We will first pay the withholding tax from the distributions to any nonresident and/or foreign partners, and to the extent that the tax exceeds the amount of distributions withheld, or if there have been no distributions to withhold, the excess will be accounted for as a distribution to such nonresident and/or foreign partners.  During March 2009, we paid $20 to the Internal Revenue Service on behalf of foreign partners.

Off-Balance Sheet Arrangements, Contractual Obligations, Liabilities and Contracts and Commitments

None

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not Applicable.

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Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures to ensure that material information relating to us is made known to the members of senior management and the Audit Committee.

Based on management's evaluation as of September 30, 2009, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective as of such date to ensure that the information required to be disclosed by us in our reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.

Management's Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f).  Under the supervision and with the participation of our management, including our principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on our evaluation under the framework in Internal Control - Integrated Framework, our management concluded that our internal control over financial reporting was effective as of September 30, 2009.  This quarterly report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.  Management's report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management's report in this quarterly report.

There were no changes to our internal controls over financial reporting during the three months ended September 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - Other Information

Items 1 through 5 are omitted because of the absence of conditions under which they are required.

Item 6.  Exhibits

Exhibits.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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