Chartermac · 10-K · For 12/31/06

Filed On 3/9/07 7:58pm ET   ·   SEC File 1-13237   ·   Accession Number 1324042-7-5

Annual Report   ·   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Chartermac 10-K December 2006                        151    712K 
 2: EX-10       Exhibit 10(S) Chartermac 10-K December 2006            1      5K 
 3: EX-10       Exhibit 10(Y) Chartermac 10-K December 2006            2      9K 

10-K   ·   Chartermac 10-K December 2006
Document Table of Contents

10-K
1st Page of 151
TOC
Top
Previous
Next
Bottom
Just 1st
 
Sponsored Ads...


UNITED STATES SECURITIES
 AND EXCHANGE COMMISSION
Washington, D.C. 20549

 FORM 10-K

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

 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006

OR

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

Commission File Number 1-13237

CHARTERMAC
(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) 317-5700               

 Securities registered pursuant to Section 12(b) of the Act:
 SHARES OF BENEFICIAL INTEREST

Name of each exchange on which registered:
 NEW YORK STOCK EXCHANGE

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

NONE

Indicate by check mark if the  registrant is a well-known  seasoned  issuer,  as
defined in Rule 405 of the Securities Act. Yes[X] No [ ]                        

Indicate  by  check  mark if the  registrant  is not  required  to file  reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]              

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. [X]                                                                  

Indicate by check mark whether the registrant is a large  accelerated  filer, an
accelerated  filer or a  non-accelerated  filer (as defined in Rule 12b-2 of the
Exchange Act). Large Accelerated filer [X] Accelerated filer [ ] Non-accelerated
filer [ ]                                                                       

Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]                                 

The  aggregate  market  value of common  equity  held by  non-affiliates  of the
registrant as of June 30, 2006 was approximately $950,633,340.                  

As of  February  23,  2007  there  were  51,404,234  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 to be held in June 2007 which are incorporated into Items 10, 11, 12, 13
and 14.                                                                         

10-K
2nd Page of 151
TOC
1st
Previous
Next
Bottom
Just 2nd

TABLE OF CONTENTS                                                               

CHARTERMAC

ANNUAL REPORT ON FORM 10-K

                                                        [Enlarge/Download Table]


                                                                                         PAGE
                                                                                             
PART I                                                                                       
            Item 1.  Business                                                              4 
            Item 1A. Risk Factors                                                         12 
            Item 1B. Unresolved Staff Comments                                            30 
            Item 2.  Properties                                                           30 
            Item 3.  Legal Proceedings                                                    30 
            Item 4.  Submission of Matters to a Vote of Security Holders                  30 

PART II                                                                                      
            Item 5.  Market for Registrant's Common Equity, Related Stockholder Matters      
                         and Issuer Purchases of Equity Securities                        31 
            Item 6.  Selected Financial Data                                              33 
            Item 7.  Management's Discussion and Analysis of Financial Condition and         
                         Results of Operations                                            33 
            Item 7A. Quantitative and Qualitative Disclosures about Market Risks          55 
            Item 8.  Financial Statements and Supplementary Data                          60 
            Item 9.  Changes in and Disagreements with Accountants on Accounting and         
                         Financial Disclosure                                            131 
            Item 9A. Controls and Procedures                                             131 
            Item 9B. Other Information                                                   131 

PART III                                                                                     
            Item 10. Directors, Executive Officers and Corporate Governance              132 
            Item 11. Executive Compensation                                              132 
            Item 12. Security Ownership of Certain Beneficial Owners and Management and      
                         Related Stockholder Matters                                     132 
            Item 13. Certain Relationships and Related Transactions, and Director            
                         Independence                                                    132 
            Item 14. Principal Accounting Fees and Services                              132 

PART IV                                                                                      
            Item 15. Exhibits and Financial Statement Schedules                          133 

SIGNATURES                                                                               139 


2 

10-K
3rd Page of 151
TOC
1st
Previous
Next
Bottom
Just 3rd

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

This  Annual  Report on Form 10-K  contains  forward-looking  statements.  These
forward-looking  statements are not historical facts, but rather our beliefs and
expectations and are based on our current expectations,  estimates, projections,
beliefs  and  assumptions  about  our  Company  and  industry.   Words  such  as
"anticipates,"  "expects,"  "intends," "plans," "believes," "seeks," "estimates"
and similar  expressions  are intended to identify  forward-looking  statements.
These  statements  are not guarantees of future  performance  and are subject to
risks,  uncertainties  and other factors,  some of which are beyond our control,
are  difficult  to predict and could cause actual  results to differ  materially
from those expressed or forecasted in the  forward-looking  statements.  Some of
these risks include, among other things:                                        

o    adverse changes in real estate markets;                          
o    competition with other companies;                                
o    interest rate fluctuations;                                      
o    general economic and business conditions;                        
o    environmental/safety requirements;                               
o    changes in applicable laws and regulations;                      
     o    our tax treatment,  the tax treatment of our  subsidiaries and the tax
treatment of our investments;                               
     o    risk of default  associated with the mortgage  revenue bonds and other
securities held by us or our subsidiaries;                  
o    risks associated with providing credit intermediation;           
o    risk of loss under mortgage banking loss sharing agreements;     
o    risk of loss from direct and indirect investments in CMBS;       
     o    the risk that  relationships with key investors and developers may not
continue;                                                   
o    our ability to generate fee income may not continue; and         
     o    risks related to the form and structure of our financing arrangements.

We caution you not to place undue reliance on these forward-looking  statements,
which reflect our view only as of the date of this annual report on Form 10-K.  

3 

10-K
4th Page of 151
TOC
1st
Previous
Next
Bottom
Just 4th

PART I
ITEM 1.  BUSINESS.                                                              

General                                                                         
-------                                                                         

We are  CharterMac,  a statutory  trust created  under the laws of Delaware.  We
conduct substantially all of our business through our subsidiaries.  For ease of
readership,  however, the term "we" (as well as "us", "our" or "the Company") as
used  throughout this document may mean a subsidiary or the business as a whole,
while the term "parent trust" refers only to CharterMac as a stand-alone entity.

Through our subsidiaries and funds which they manage, we are one of the nation's
leading  real  estate  finance and  investing  companies.  We are  strategically
positioned  in the center of users of capital  and  providers  of capital in the
commercial and multifamily real estate industry. We provide capital solutions to
real estate developers and owners, as well as investment  products to retail and
institutional investors.                                                        

We commenced  operations in October 1997 and have since expanded through several
acquisitions.                                                                   

Additional Information                                                          
----------------------                                                          

Additional  information  about  CharterMac  beyond what is included in this Form
10-K,  including  our CODE OF  BUSINESS  CONDUCT  AND ETHICS,  is  available  at
www.chartermac.com.  As soon as  reasonably  practicable  after such material is
electronically  filed  with,  or  furnished  to,  the  Securities  and  Exchange
Commission ("SEC") we make available, on or through our website, free of charge:

o    our annual report on Form 10-K;                                  
o    our quarterly reports on Form 10-Q;                              
o    our current reports on Form 8-K; and                             
     o    amendments  to those  reports  filed or furnished  pursuant to Section
13(a) or 15(d) of the Exchange Act.                         

You may also read and copy these materials at the SEC's Public Reference Room at
450 Fifth Street, NW, Washington, DC 20549, or obtain them by calling the SEC at
1-800-SEC-0300.  The SEC  also  maintains  an  Internet  website  that  contains
reports,  proxy  and  information  statements  and other  information  regarding
issuers that file electronically with the SEC at www.sec.gov.  We will provide a
copy of any of the foregoing documents upon request.                            

None of the information on our website that is not otherwise expressly set forth
or incorporated by reference in the Form 10-K is a part of this Form 10-K.      

Business Overview                                                               
-----------------                                                               

Through our subsidiaries and funds which they manage, we are a full-service real
estate finance and investing  company.  Our  subsidiaries  have direct financing
relationships   with   approximately  875  real  estate  developers  and  owners
throughout   the  country  and  we  have  strong   relationships   with  various
institutional  investors,  pension funds and endowments.  We provide an array of
products  and operate  from a fully  integrated  platform,  which  enables us to
originate,  underwrite  and  manage  the risk of most  transactions  in which we
provide debt or equity. Our platform offers us several  competitive  advantages,
including:                                                                      

     o    THE  ABILITY  TO   CROSS-SELL   FINANCING   PRODUCTS.   Frequently  on
          transactions,  we  offer  more  than  one  component  of a  property's
capital;                                                    
     o    THE ABILITY TO ORIGINATE THE TRANSACTION  WHOLESALE,  which enables us
          to capture  substantially  all of the financing fees  associated  with
each transaction;                                           
     o    THE ABILITY TO CONTROL THE CREDIT QUALITY OF THE UNDERLYING  PROPERTY.
          By working  directly  with the  property's  owner and by managing  the
          risks of the  underlying  asset,  our credit losses have  historically
been low; and                                               
     o    THE ABILITY TO PROVIDE PRODUCTS AND SERVICES THROUGHOUT THE PROPERTY'S
FINANCING LIFE CYCLE.                                       

4 

10-K
5th Page of 151
TOC
1st
Previous
Next
Bottom
Just 5th

Operating Segments                                                              
------------------                                                              

We operate in four business segments:                                           

     1.   PORTFOLIO INVESTING, which includes subsidiaries that invest primarily
          in tax-exempt  first mortgage revenue bonds issued by various state or
          local governments,  agencies or authorities and other investments. The
          proceeds  of  mortgage  revenue  bonds  are used by the  borrowers  to
          finance the new construction, substantial rehabilitation, acquisition,
          or refinancing of affordable multifamily housing throughout the United
States.                                                     

          This segment may also include loans to and other  investments in other
          business or funds involved in real estate or real estate finance. Such
          investments  have  included our  pre-acquisition  investment  in ARCap
Investors, LLC ("ARCap").                                   

2.   FUND MANAGEMENT, which includes:                                 

          o    Tax Credit Fund  Sponsorship  -  Subsidiaries  that  sponsor real
               estate   investment   funds  that  primarily   invest  equity  in
               Low-Income Housing Tax Credit ("LIHTC") properties. Many of these
               partnerships  are  included  in  our  Consolidated   Partnerships
               segment.  In exchange for sponsoring and managing these funds, we
               receive fee income for providing asset management,  underwriting,
origination and other services;                   
          o    High Yield CMBS Fund Sponsorship - Subsidiaries  that sponsor and
               manage  funds that invest in high yield real  estate  instruments
               including B-Notes, bridge loans, mezzanine loans and subordinated
               interests  associated with Commercial  Mortgage Backed Securities
               ("CMBS"),   commercial   real   estate   mortgages   and  similar
               investments,  which partnerships are included in our Consolidated
               Partnerships   segment.   These   subsidiaries   also  hold,  for
               investment,  investments  like the ones held by sponsored  funds.
               These   subsidiaries   earn  income  and  promotes   from  equity
               investments in the sponsored funds and interest income from their
investments;                                      
          o    Direct Loan Fund  Sponsorship  - Equity  investment in ARCap Real
               Estate Special Situations Mortgage Fund, LLC ("ARESS") from which
               we earn income and promotes from our equity  investment.  We also
               manage  the  operations  of  ARESS,  which  is  included  in  our
Consolidated Partnerships segment;                
          o    Equity Fund Sponsorship  -Membership interest in CharterMac Urban
               Capital  LLC  ("CUC"),  an  investment  fund with the  California
               Public  Employees   Retirement  System  ("CalPERS")  as  majority
               investor,  focusing on investments  in multifamily  properties in
               major urban markets.  Our  membership  interest in CUC includes a
               co-investment  obligation  amounting to 2.5% of capital invested.
               The CUC fund generates  income and cash flow  predominantly  from
asset management fees and promote income;         
          o    Advisory  Services - Subsidiaries  that provide advisory services
               to the parent trust,  other  subsidiaries of ours and to American
               Mortgage  Acceptance  Company ("AMAC"),  an affiliated,  publicly
traded real estate investment trust; and          
          o    Credit  Intermediation - Subsidiaries  that participate in credit
               intermediation   transactions,   including   those  that  provide
               specified  returns to  investors in LIHTC equity funds and credit
               intermediation to our Portfolio Investing businesses, in exchange
for fees.                                         

     3.   MORTGAGE  BANKING,  which  includes  subsidiaries  that  originate and
          underwrite predominantly multifamily mortgage loans on behalf of third
parties, including:                                         

  o    The Federal National Mortgage Association ("Fannie Mae");
    o    The Federal Home Loan Mortgage Corporation ("Freddie Mac");
o    The Federal Housing Authority ("FHA");                 
o    The Government National Mortgage Association ("GNMA"); 
o    ARESS and AMAC; and                                    
o    Insurance companies and conduits.                      

  In exchange for these activities, we receive origination fees.

          This segment also includes  subsidiaries that provide  multifamily and
          commercial  loan servicing for third parties and special  servicing on
          CMBS  securitizations  in which  either  we, or the  funds we  manage,
          invest.  In exchange  for these  services,  we earn a variety of fees,
       including base servicing fees, liquidation fees, and assumption and

5 

10-K
6th Page of 151
TOC
1st
Previous
Next
Bottom
Just 6th

          modification  fees. We also earn interest income on escrow and reserve
balances held on loans we service.                          

     4.   CONSOLIDATED  PARTNERSHIPS,  which include  primarily the LIHTC equity
          funds and debt funds we sponsor through the Fund Management  segment's
          subsidiaries  and which we are required to  consolidate  in accordance
          with FIN 46(R), as well as other  partnerships we control but in which
          we have little or no equity  interest (see Note 1 to the  consolidated
          financial statements). This segment also includes CMBS and Direct Loan
          funds we sponsor in which we have minority interests but for which our
subsidiaries are general partners.                          

Comparative  segment financial  information for 2006, 2005 and 2004 is presented
in Note 20 to the consolidated financial statements.                            

1. PORTFOLIO INVESTING                                                          

We conduct most of our portfolio  investing through our CharterMac Equity Issuer
Trust I and  CharterMac  Equity Issuer Trust II  subsidiaries.  Throughout  this
document,  we will refer to both of these  subsidiaries  collectively as "Equity
Issuer".                                                                        

As of December 31, 2006, our revenue bond portfolio includes direct and indirect
interests  in  mortgage   revenue   bonds  with  an  aggregate   fair  value  of
approximately  $2.8 billion (prior to $397.3 million of eliminations  related to
bonds issued by partnerships we consolidate),  secured by affordable multifamily
properties  containing  56,048  units  located in 30 states and the  District of
Columbia. While most of these mortgage revenue bonds generate tax-exempt income,
certain of them generate taxable income.  The taxable mortgage revenue bonds are
held at the parent trust.                                                       

Our Portfolio Investing business generates most of its income and cash flow from
a positive  spread  between the interest  earned from our mortgage  revenue bond
portfolio and the cost of capital we use to purchase the bonds.  We occasionally
receive participating  interest on certain mortgage revenue bonds which is equal
to a  percentage  of net  property  cash  flow  of the net  sale or  refinancing
proceeds.  We also  receive  fees  from  borrowers  for the  acquisition  of new
mortgage revenue bonds.                                                         

The acquisition of mortgage revenue bonds requires capital. In addition to using
a portion of our operating  cash flows,  we obtain such capital by  securitizing
most of the bonds we purchase and by issuing equity securities.                 

For  more  information  on  our  securitization  activity,  see  Note  8 to  our
consolidated  financial  statements.  For  information  regarding  issuances  of
preferred shares of Equity Issuer and our common and preferred shares, see Notes
13 and 14 to our consolidated financial statements.                             

This segment may also include loans to and other investments in other businesses
or funds involved in real estate or real estate finance.  Such  investments have
included our pre-acquisition investment in ARCap.                               

2. FUND MANAGEMENT                                                              

Our Fund Management segment includes:                                           

o    Tax Credit Fund Sponsorship;                                     
o    High Yield CMBS Fund Sponsorship;                                
o    Direct Loan Fund Sponsorship;                                    
o    Equity Fund Sponsorship;                                         
o    Advisory Services; and                                           
o    Credit Intermediation.                                           

TAX CREDIT FUND SPONSORSHIP                                                     
---------------------------                                                     

We conduct our tax credit fund  sponsorship  activities  through our  CharterMac
Capital LLC ("CharterMac Capital") subsidiary.                                  

6 

10-K
7th Page of 151
TOC
1st
Previous
Next
Bottom
Just 7th

CharterMac  Capital is one of the nation's  largest sponsors of LIHTC investment
funds, having raised nearly $8.1 billion in equity from institutional and retail
investors.  As a sponsor of over 130 public and private  real estate  investment
programs, CharterMac Capital has provided financing for over 1,300 properties in
46 states, Puerto Rico and the District of Columbia.                            

In  a  typical  LIHTC  investment  fund,  investors  acquire  a  direct  limited
partnership interest in an "upper-tier" investment  partnership.  The investment
partnership,  in turn,  invests as a limited partner in one or more "lower-tier"
operating  partnerships which own and operate  multifamily  properties.  Limited
partners in the upper-tier  partnerships are most often corporations,  which are
able to  utilize  the tax  benefits  associated  with the LIHTC  granted  to the
lower-tier  partnership  and usually  derive limited  economic  benefit from the
investment  other than  these  expected  tax  credits  and tax  losses  from the
lower-tier  partnership's  operation  of  the  properties.  In  some  cases,  in
conjunction with the disposition of the funds' investments, the limited partners
may receive an additional return.                                               

We often  borrow  cash from our credit  facility  lender to  acquire  lower-tier
partnership investments. This arrangement enables us to obtain and hold suitable
investments for a fund until it has admitted  investors and obtained  investment
capital. As a result, we are better able to provide investment  opportunities to
the  funds we  sponsor  when  investment  capital  is  available.  When we admit
investors to a fund, the fund  simultaneously  (in most cases) pays us an amount
sufficient to enable us to repay the monies we borrowed,  and the fund is either
admitted as a limited  partner of the  lower-tier  operating  partnership in our
place or the credit facility lender releases its lien on the fund's assets.     

Tax credit fund sponsorship generates income and cash flow predominantly from:  

     o    organization  and offering fees we earn in connection with the capital
          raising and sponsorship of investment programs,  which we receive upon
the closing of a fund;                                      
     o    fees  associated  with  acquisition  activity of each fund we sponsor,
which we receive at the time of the acquisition; and        
     o    partnership  management  and asset  management  fees  associated  with
          ongoing  administration  of  investment  programs we advise,  which we
          receive  either  at the  time a fund  closes  or over  several  years,
depending upon the terms of the partnership agreements.     

HIGH YIELD CMBS FUND SPONSORSHIP                                                
--------------------------------                                                

We conduct our high yield CMBS fund sponsorship  activities  through ARCap which
we wholly  acquired in August  2006.  ARCap  serves as managing  member for four
funds which invest in high yield real estate instruments ("CMBS Partnerships"). 

CMBS are publicly and privately traded bond issues backed by pools of commercial
real estate  mortgages.  These  securities  are rated by  nationally  recognized
rating agencies such as Fitch Ratings Ltd. ("Fitch"),  Standard & Poor's ("S&P")
and Moody's Investor Services ("Moody's"). The senior tranche of a bond issue is
the highest rated security,  typically "AAA" while more junior tranches  receive
lower  ratings  down to the most junior  class  which is not rated.  "High yield
CMBS"  is the  component  of  CMBS  issues  rated  "BB+"  and  lower  (including
non-rated)  tranches.  The  purchase  of  high  yield  CMBS  is  similar  to the
acquisition of real estate equity  investments in that there is a heavy emphasis
on the  performance  and expected cash flows of the real estate.  In the case of
high yield CMBS, a CMBS offering  includes  hundreds of individual loans secured
by hundreds of discrete real estate  projects.  Our funds provide access to this
market to investors without requiring the investors to incur the cost to develop
the infrastructure and personnel needed to make knowledgeable investments in the
high yield CMBS market.                                                         

High yield CMBS fund sponsorship  generates  income and cash flow  predominantly
from:                                                                           

o    participating income from our equity interest in the funds; and  
o    promotes we earn, based on certain events in the fund life-cycle.

DIRECT LOAN FUND SPONSORSHIP                                                    
----------------------------                                                    

We own 5% of ARESS and we manage its operations.  ARESS commenced  operations in
May 2006 and our management and partial ownership commenced upon our acquisition
of ARCap.                                                                       

7 

10-K
8th Page of 151
TOC
1st
Previous
Next
Bottom
Just 8th

ARESS  invests in bridge loans  secured by first  mortgages for the refinance of
commercial  properties  with  existing  loans,  subordinate  interests  in first
mortgages  ("B-notes")  and  subordinate  loans  secured  by  interests  in  the
borrowing entity  ("mezzanine  loans").  Bridge loans are typically  utilized to
provide financing to a borrower who intends to reposition its property,  whether
through  rehabilitation  or preparation for sale.  These loans typically carry a
variable  rate of  interest,  although  fixed rate  bridge  loans may be made in
certain circumstances. The spread will vary depending upon the market, the risk,
the  borrower  and the  security.  B-notes  and  mezzanine  loans  are a growing
component of real estate capitalization and access to them on the open market is
extremely competitive.                                                          

Direct Loan fund sponsorship generates income and cash flow predominantly from: 

     o    participating  income we earn from our equity  interest  in the funds;
and                                                         
o    promotes we earn, based on certain events in the fund life-cycle.

EQUITY FUND SPONSORSHIP                                                         
-----------------------                                                         

CUC is an  investment  fund with CalPERS as the majority  investor,  focusing on
investments  in multifamily  properties in major urban  markets.  Our membership
interest in CUC includes a co-investment obligation amounting to 2.5% of capital
invested. As of December 31, 2006, CUC had $121.9 million in assets.            

Our investment in and management of the CUC fund generates  income and cash flow
predominantly from asset management fees and promote income.                    

ADVISORY SERVICES                                                               
-----------------                                                               

CharterMac Capital and its subsidiaries provide management and advisory services
to the parent trust and other subsidiaries of CharterMac, as well as to AMAC.   

Providing services to CharterMac subsidiaries generates income and cash flows in
this segment from:                                                              

     o    fees  associated  with  asset  management  services  provided  to  the
          Portfolio  Investing  segment with regard to the investments it holds;
and                                                         
     o    fees  associated  with the  origination  of certain  mortgages  by our
Mortgage Banking segment.                                   

While these fees are eliminated in consolidation,  our segment results presented
elsewhere  in this  document  reflect  these  fees as earned  (see  MANAGEMENT'S
DISCUSSION  AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF  OPERATIONS  and
Note 20 to the consolidated financial statements).                              

AMAC  is a  publicly  traded  real  estate  investment  trust  that  focuses  on
originating  and acquiring  mortgage loans secured by multifamily and commercial
properties  throughout  the  United  States.  AMAC  also  invests  in  uninsured
mezzanine  loans,   construction  loans,  first  mortgage  loans,   subordinated
interests in first  mortgage  loans and bridge  loans.  As of December 31, 2006,
AMAC  had  $721.0  million  in  assets  and a  total  market  capitalization  of
approximately $140.8 million.                                                   

Providing management to AMAC generates income and cash flow predominantly from: 

     o    acquisition fees paid by the borrowers upon the closing of a loan that
we originate for AMAC;                                      
o    management fees based on shareholders' equity; and               
     o    incentive  management fees received  annually if AMAC achieves certain
earnings and distribution benchmarks.                       

CREDIT INTERMEDIATION                                                           
---------------------                                                           

We  conduct  our  credit   intermediation   activities   primarily  through  our
Centerbrook  Holdings LLC ("Centerbrook")  subsidiary which commenced operations
in June 2006 and through our Charter Mac Corporation ("CM Corp.") subsidiary. We
own 90% of Centerbrook and IXIS Capital Markets North America Inc. ("IXIS"),  an
unrelated  party,  owns the  remainder.  IXIS has been  issued  warrants  which,
generally, may be exercised beginning June 2009 and if exercised, would increase
IXIS' ownership percentage to 19%.                                              

8 

10-K
9th Page of 151
TOC
1st
Previous
Next
Bottom
Just 9th

What we refer to as "credit intermediation" falls into several categories:      

     o    using  credit  default  swaps to support  the  credit of the  mortgage
revenue bonds in our securitization programs;               
     o    using  credit  default  swaps to  provide a  specified  rate of return
          during the life of an LIHTC fund we sponsor. These transactions may be
          for the  construction  period  or the  operation  period  of a pool of
          properties,   or  for  the  combined   periods.   These   transactions
          historically have involved supporting  obligations of a primary credit
support provider;                                           
     o    supporting  a  developer's  credit  during  the  construction   and/or
lease-up phase of a property; and                           
     o    supporting a  developer's  credit  following  the  stabilization  of a
property for the operational period.                        

While  historically  CM Corp.  has  supported the  commitments  of a third-party
primary  intermediator,  we expect  that  Centerbrook  may  fulfill  the primary
intermediator role in future transactions.                                      

Centerbrook's total volume of credit intermediation activity since its inception
in June 2006 totals approximately $1.1 billion, predominantly in connection with
securitizations  in the Portfolio  Investing  segment.  While  Centerbrook  will
initially be involved in credit  intermediation  for  transactions  in which our
subsidiaries are involved,  it will also seek to provide these services to third
party customers.                                                                

Upon its  launch,  Centerbrook  was  capitalized  with equity by us and IXIS and
entered  into a senior debt  facility and a mezzanine  debt  facility to provide
capital to support its business lines.                                          

This segment generates income and cash flows from credit intermediation fees and
from interest income on cash invested.  Credit intermediation fees are generally
recognized over the applicable risk-weighted periods.                           

3. MORTGAGE BANKING                                                             

Our Mortgage Banking activities include the following:                          

o    originating mortgage loans; and                                  
 o    servicing mortgage loans we originate and loans for third parties.

ORIGINATIONS                                                                    
------------                                                                    

We conduct our mortgage  origination  activity  primarily through our subsidiary
CharterMac  Mortgage  Capital Corp.  ("CMC"),  a  full-service,  direct mortgage
banking firm specializing in originating,  underwriting,  and servicing mortgage
loans for multifamily and commercial properties nationwide. CMC also manages the
operations of another  subsidiary,  CharterMac  Mortgage  Partners  Corporation,
which  originates  and  services  certain  Freddie  Mac loans.  Throughout  this
document, we will refer to "CMC" as encompassing our entire mortgage origination
operations.                                                                     

Our mortgage originations operations include:                                   

     o    closing and delivering  multifamily  mortgages to Fannie Mae under its
          Delegated  Underwriter  and  Servicer  ("DUS")  program.   Fannie  Mae
          delegates the  responsibility for originating,  underwriting,  closing
          and delivering  multifamily mortgage loans to the DUS lenders. In most
          cases,  the DUS lenders  share the risk of loss on the mortgage  loans
          with Fannie Mae.  Under the DUS program,  upon  obtaining a commitment
          from Fannie Mae with regard to a particular  loan,  Fannie Mae commits
          to  acquire  or credit  enhance  the  mortgage  loan  based upon CMC's
          underwriting,  and (in the case of loss  sharing  loans) CMC agrees to
          bear a  portion  of the risk of  potential  losses  in the  event of a
          default.  Fannie Mae  commitments may be made to acquire and/or credit
          enhance  the  mortgage  loan  from CMC for cash or in  exchange  for a
mortgage-backed security backed by the mortgage loan;       
     o    closing and delivering  multifamily mortgages to Freddie Mac under the
          Freddie Mac Program Plus ("Program  Plus") and Delegated  Underwriting
          Initiative  ("DUI")  programs.  These  programs are similar to the DUS
 program, although Program Plus does not involve loss sharing;
o    originating mortgages for AMAC and ARESS;                        
o    acting as an approved seller for Ginnie Mae;                     

9 

10-K
10th Page of 151
TOC
1st
Previous
Next
Bottom
Just 10th

     o    originating loans as a leading  commercial loan correspondent for Wall
Street conduits and life insurance companies; and           
o    acting as an approved loan processor for the FHA.                

Mortgage  loans we  originate  for  Fannie  Mae,  Freddie  Mac or Ginnie Mae are
generally  closed in CMC's name,  using cash borrowed  from a warehouse  lender.
Following  closing  of a loan,  the loan  documentation  and an  assignment  are
delivered to the mortgagor,  or a document custodian on its behalf, and the cash
purchase  price or  mortgage-backed  security is delivered to us. This may occur
from one week to three months following the closing of the loan. We use the cash
received to repay the warehouse loans or we sell the mortgage-backed  securities
for cash pursuant to prior  agreements  and use that cash to repay the warehouse
loans.  We do not retain any  interest in any of the  mortgage  loans except for
mortgage servicing rights ("MSRs") and certain contingent  liabilities under the
loss-sharing arrangements with Fannie Mae and Freddie Mac.                      

SERVICING                                                                       
---------                                                                       

We service many of the loans we originate and  sub-service  loans  originated by
other firms. We also provide primary and interim loan servicing to third parties
and serve as the named special servicer on CMBS  securitizations in which either
ARCap, or the funds ARCap manages, invest.                                      

Our mortgage  banking  activities  generate  income and cash flow  predominantly
from:                                                                           

o    origination fees;                                                
o    assumption and modification fees;                                
     o    ongoing  fees for  servicing a majority of the loans we  originate  as
          well as other loans that we sub-service. Servicing fees include a loss
          sharing  premium for loans  originated  for Fannie Mae (and in certain
cases, Freddie Mac);                                        
o    liquidation fees;                                                
o    prepayment penalties, generally associated with refinancing; and 
o    interest earned on amounts held in escrow.                       

4. CONSOLIDATED PARTNERSHIPS                                                    

In accordance with accounting rules regarding consolidation,  we consolidate the
balance  sheets and  operations  of  numerous  funds  that we sponsor  and other
partnerships that we manage.                                                    

Consolidated Partnerships consist of four groups:                               

     o    Funds   we   sponsor   to   syndicate   LIHTC   Investments    ("LIHTC
Partnerships");                                             
     o    Property  level  partnerships  for which we have  assumed  the role of
general partner ("Property Partnerships");                  
     o    CMBS Partnerships we sponsor, which we initially consolidated upon the
ARCap acquisition in August 2006; and                       
     o    a Direct Loan Partnership we manage and consolidate (ARESS),  which we
initially consolidated following our acquisition of ARCap.  

While  we  have  little  or  no  equity  interest  in  the  LIHTC  and  Property
Partnerships,  we control them for reasons  associated with our role in managing
them and the nominal equity interests of our executive officers. With respect to
the CMBS and Direct Loan  Partnerships,  we do own minority  interest of varying
degrees,  but all less  than  25%.  While  our  Fund  Management  and  Portfolio
Investing  segments  earn fees or interest  from  certain of these  consolidated
partnerships, we consider the partnerships as a separate business for management
purposes.                                                                       

The high yield CMBS funds finance their investments through equity contributions
from their  investors,  and from proceeds from repurchase  facility  agreements.
Once the high yield CMBS funds  accumulate  investments of  appropriate  number,
size and  diversity,  the  repurchase  agreement  financing is replaced with CDO
financing, which provides long-term nonrecourse, matched term funding secured by
the CMBS investments.                                                           

ARESS finances its investments  through equity  contributions  from its members,
and from proceeds under repurchase facility  agreements.  ARESS also maintains a
subscription  line credit  facility,  which is  collateralized  by the remaining

10

10-K
11th Page of 151
TOC
1st
Previous
Next
Bottom
Just 11th

uncalled  capital  commitments  of its  members  and  may  be  used  to  acquire
investments or for general working capital purposes.                            

For a  more  detailed  discussion,  see  Note 1 to  the  consolidated  financial
statements.                                                                     

Competition                                                                     
-----------                                                                     

We face  increasing  levels of competition  both in terms of new competitors and
new competing products. From time to time, we may be in competition with private
investors,  investment banks, mortgage banking companies,  lending institutions,
Government  Sponsored  Enterprises  ("GSEs") such as Fannie Mae and Freddie Mac,
mutual  funds,  domestic  and  foreign  credit  intermediators,  bond  insurers,
investment  partnerships  and other  entities with  objectives  similar to ours.
Although  we  operate  in a  competitive  environment,  competitors  focused  on
providing all of our custom-designed programs are relatively few. Specifically: 

     o    our Portfolio  Investing  business  competes  directly with commercial
          banks,  GSEs,  real estate  finance  companies  and others  seeking to
invest in tax-exempt mortgage revenue bonds;                
     o    our Fund Management  business competes directly with others seeking to
          raise  capital for tax  advantaged  funds,  some of which offer credit
          intermediation  for their funds.  We also  compete  with  regional and
          national  banks that directly  acquire LIHTC  investments,  high yield
          CMBS debt  instruments  and joint venture equity as well as with other
real estate fund management companies;                      
     o    our Mortgage Banking business is in competition with 24 other licensed
          DUS lenders which originate  multifamily mortgages on behalf of Fannie
          Mae, 30 other Freddie Mac Program Plus lenders,  four other  companies
          that participate in the DUI program as well as numerous banks, finance
          companies  and others  that  originate  mortgages  for  investment  or
resale; and                                                 
     o    our credit  intermediation  business is in competition with investment
         banks, insurance companies and other credit intermediation companies.

Some of these competitors have  substantially  greater financial and operational
resources than we do. In addition,  affiliates of some of our managing  trustees
have formed,  and may continue to form, various entities to engage in businesses
that may be  competitive  with us,  but,  at this  time,  there is no other such
business that has all of our real estate  financing and investing  products (see
RISKS RELATED TO INVESTING IN OUR COMPANY in Item 1A below). However, we feel we
can effectively compete due to:                                                 

     o    our on-going relationships with developers and other users of capital;
o    our unified product platform; and                                
     o    our efforts to continually  develop new products that will  complement
          our existing  diversified  real estate finance and investment  product
offerings.                                                  

Financing and Equity                                                            
--------------------                                                            

As noted in the segment  descriptions  above, we typically fund the expansion of
our  business  through  a  combination  of  operating  cash  flows,   short-term
borrowings,  securitizations,  repurchase  agreements,  long-term borrowings and
equity issuances. These funding vehicles are described in detail in MANAGEMENT'S
DISCUSSION AND ANALYSIS - LIQUIDITY AND CAPITAL  RESOURCES and in Notes 8, 9, 13
and 14 to our consolidated financial statements.                                

Tax Matters                                                                     
-----------                                                                     

We are a Delaware  statutory  trust and a significant  portion of our revenue is
non-taxable. Further, for federal income tax purposes, the parent trust and many
of our  subsidiaries  (including  all that  constitute  our Portfolio  Investing
segment) are treated as  partnerships  that are not subject to income taxes.  We
pass  through  our  income,   including  federally  tax-exempt  income,  to  our
shareholders for inclusion in their tax returns. We derive a substantial portion
of our income from  ownership of first  mortgage  multifamily  housing  "Private
Activity  Bonds." The interest from these bonds is generally exempt from regular
federal income tax. However,  the Tax Reform Act of 1986 classified this type of
interest for bonds issued after  August 7, 1986,  as a tax  preference  item for
individual  and  corporate   alternative  minimum  tax  ("AMT")  purposes.   The
percentage of our tax-exempt  interest  income subject to AMT was  approximately
94% for the year ended  December 31, 2006,  compared to 93% in 2005 and 2004. We
expect the  percentage to increase over time as older pre-AMT  mortgage  revenue
bonds are  repaid.  As a result of AMT,  the  percentage  of our income  that is
exempt from federal income tax may be different for each shareholder.           

11

10-K
12th Page of 151
TOC
1st
Previous
Next
Bottom
Just 12th

Through CM Corp. and its subsidiaries,  which  collectively  operate much of our
Fund  Management  and all of our Mortgage  Banking  businesses,  we also conduct
businesses  that  generate  income for which we pay income  taxes.  In addition,
through  ARCap and its  subsidiaries  we generate  income that is taxable to our
shareholders,  since such income is included in income of the parent trust. That
income is passed through to our shareholders, as noted above.                   

Governance                                                                      
----------                                                                      

We are governed by a board of trustees  comprised of thirteen managing trustees,
seven of whom are independent. Our board of trustees has five committees:       

(1)  Audit;                                                           
(2)  Compensation;                                                    
(3)  Nominating/Governance;                                           
(4)  Capital Markets; and                                             
(5)  Investment.                                                      

In accordance with New York Stock Exchange guidelines,  the Audit,  Compensation
and Nominating/Governance committees consist entirely of independent trustees.  

Employees                                                                       
---------                                                                       

Our subsidiaries had  approximately  500 employees at December 31, 2006, none of
whom were parties to any collective bargaining agreement.                       

Regulatory Matters                                                              
------------------                                                              

Our  Mortgage   Banking   business  is  subject  to  various   governmental  and
quasi-governmental  regulations.  As noted above, CMC is licensed or approved to
service and/or  originate and sell mortgage loans under Fannie Mae, Freddie Mac,
Ginnie Mae and FHA  programs.  FHA and Ginnie Mae are  agencies  of the  Federal
government  and  Fannie  Mae  and  Freddie  Mac are  federally-chartered  public
corporations.  These agencies  require CMC to meet minimum net worth and capital
requirements  and to comply with other  reporting  requirements.  Mortgage loans
made under these  programs are also required to meet the  requirements  of these
programs. In addition,  under Fannie Mae's DUS program, CMC has the authority to
originate loans without a prior review by Fannie Mae and is required to share in
the losses on loans originated  under this program.  If CMC fails to comply with
the  requirements  of these  programs,  the agency can  terminate its license or
approval. In addition, Fannie Mae and Freddie Mac have the authority under their
guidelines  to terminate a lender's  authority to  originate  and service  their
loans  for any  reason.  If CMC's  authority  is  terminated  under any of these
programs,  it would prevent CMC from  originating or servicing  loans under that
program.  As a condition for receiving  Fannie Mae and Freddie Mac's approval of
our  acquisitions of the businesses  comprising the Mortgage  Banking segment we
are required to guarantee such business' obligations under these programs.      

ITEM 1A. RISK FACTORS.                                                          

As with any business,  we face a number of risks.  If any of the following risks
occur, our business,  prospects,  results of operations and financial  condition
would likely suffer. We have grouped these risk factors into several categories,
as follows:                                                                     

1.   General Risks Related to Our Business                            
2.   Risks Related to Our Portfolio Investing Business                
3.   Risks Related to Our Fund Management Business                    
4.   Risks Related to Our Mortgage Banking Business                   
5.   Risks Related to Application of Tax Laws                         
6.   Risks Related to Investing in Our Company                        

12

10-K
13th Page of 151
TOC
1st
Previous
Next
Bottom
Just 13th

1. GENERAL RISKS RELATED TO OUR BUSINESS                                        

THERE ARE RISKS ASSOCIATED WITH THE PROPERTIES UNDERLYING OUR FINANCING PRODUCTS
AND INVESTMENTS THAT COULD ADVERSELY AFFECT OUR NET INCOME AND CASH FLOWS       

Through our subsidiaries, we derive a large portion of our earnings by:         

o    investing in mortgage revenue bonds;                             
o    sponsoring funds that provide equity to LIHTC properties;        
     o    sponsoring  funds that originate or acquire direct  mortgage loans and
high yield CMBS or joint venture equity; and                
o    originating and servicing mortgages.                             

With respect to  affordable  housing  properties,  in many cases we are both the
sponsor of the fund and the holder of the debt secured by the property  which is
indirectly  owned by the fund. In addition,  we also support credit on behalf of
developers,  provide  specified  investment  returns to the investors in certain
equity  funds we sponsor  and issue other  credit  support  associated  with the
performance of a property.                                                      

Our  success  depends  in  large  part  on the  performance  of  the  properties
underlying our financing and investing products and,  therefore,  subjects us to
various types and degrees of risk, including the following:                     

     o    the property securing our debt might not generate sufficient income to
 meet its operating expenses and payments on its related debt;
     o    local,  regional or national economic  conditions may limit the amount
          of rent that can be charged for rental units at the properties and may
          result in a  reduction  in rent  payments  or the  timeliness  of rent
payments or a reduction in occupancy levels;                
     o    federal LIHTCs and local, state and federal housing subsidy or similar
          programs which apply to many of the properties impose rent limitations
          that could adversely  affect the ability to increase rents to generate
          the funds  necessary to maintain the  properties in proper  condition,
          which is particularly  important  during periods of rapid inflation or
declining market value of such properties;                  
     o    if a bond or other  investment  defaults,  the  value of the  property
          securing  such  investment  (plus,  for  properties  that have availed
          themselves of the federal  LIHTC,  the remaining  value of such LIHTC)
        may be less than the unamortized principal amount of the investment;
     o    there are certain types of losses (generally of a catastrophic nature,
          such as earthquakes,  floods,  terrorism, wars and toxic mold or other
          environmental   conditions)  which  are  either   uninsurable  or  not
economically insurable;                                     
     o    under various laws,  ordinances and regulations,  an owner or operator
          of real estate is liable for damages caused by or the costs of removal
          or remediation of certain  hazardous or toxic substances  released on,
          above, under or in such real estate. These laws often impose liability
          whether or not the owner knew of, or was responsible for, the presence
          of such hazardous or toxic  substances.  As a result,  the entities we
          sponsor  which own real  estate,  and the  owners  of the real  estate
          securing our investments, could be required to pay for such damages or
removal or remediation costs; and                           
o    a guarantor may be unable to fulfill its obligations.            

All of these  conditions  and events may increase the  possibility  that,  among
other things:                                                                   

     o    a property owner may be unable to meet its obligations to us as holder
of its debt;                                                
     o    a  property  owner  may  default  on a  mortgage  for  which we have a
loss-sharing obligation;                                    
o    a fund may not be able to pay our fees;                          
     o    a fund may not generate  the return that we have  committed to provide
and we may be called upon to satisfy the promised return;   
     o    our promotes from fund  management  may be subject to recapture if the
funds do not reach overall investment hurdles; and          
    o    we could lose our invested capital and/or anticipated future revenue.

This could decrease the fair value of our  investments,  lower the fair value of
assets we pledge as collateral,  impair our ability to generate new business and
affect our net income and cash flows.                                           

13

10-K
14th Page of 151
TOC
1st
Previous
Next
Bottom
Just 14th

WE MAY SUFFER ADVERSE CONSEQUENCES FROM CHANGING INTEREST RATES                 

Because a large  portion of the debt we owe is  variable  rate,  an  increase in
interest  rates  could  negatively   affect  our  net  income  and  cash  flows.
Additionally, increasing interest rates may:                                    

     o    reduce the fair value of our  investments or the  investments of funds
          we  manage,  including  our  fixed-rate  mortgage  revenue  bonds  and
residual interests in securitization transactions;          
     o    decrease the amount we could realize on the sale or financing of those
investments;                                                
o    reduce the income and promotes from funds that we manage;        
     o    result  in  a  reduction  in  the  number  of  properties   which  are
economically feasible to finance;                           
     o    reduce the demand for  financing,  which  could  limit our  ability to
          invest in mortgage revenue bonds or to structure transactions, thereby
reducing fees and interest we receive;                      
o    increase our borrowing costs;                                    
o    restrict our access to capital;                                  
     o    cause  investors  to  find  alternative   investments  that  are  more
attractive than the equity funds we sponsor; and            
     o    adversely  affect the amount of cash  available  for  distribution  to
shareholders.                                               

Since a  significant  portion  of our  investments  are  residual  interests  in
mortgage  revenue bonds or other securities whose cash flow is first used to pay
senior  securities with  short-term  floating  interest  rates,  any increase in
short-term  interest  rates will  increase  the amount of  interest  paid on the
senior  securities  and  reduce  the net cash  flow in our  Portfolio  Investing
business.                                                                       

Conversely,  a decrease in interest rates may lead to the refinancing of some of
the debt we own if lockout  periods  have ended.  We may not be able to reinvest
the  proceeds of any such  refinancing  at the same  interest  rates as the debt
refinanced.  Additionally,  falling interest rates may prompt historical renters
to become  homebuyers,  in turn potentially  reducing the demand for multifamily
rental  housing.  Further,  a portion of our net income is generated by interest
income we earn on mortgage escrow deposits.  If interest rates were to decrease,
our net income in the Mortgage Banking segment would decrease as well.          

Furthermore,  strategies  we may follow to address  these  risks  carry risks of
their own, including, but not limited to:                                       

     o    the potential inability to refinance  variable-rate debt at terms that
we find acceptable;                                         
     o    alternate  sources of fixed rate or lower  cost  financing  may not be
available to us;                                            
     o    the risk that interest rate swap  counterparties  may default on their
obligations to us;                                          
     o    we may not be able to match the  duration  or reset  periods of assets
          and  liabilities  that we want to  alleviate  the  effect of  changing
rates; and                                                  
     o    other efforts to manage risks related to changes in interest rates may
not be successful.                                          

If a change in  interest  rates  causes the  consequences  described  above,  or
otherwise  negatively  affects us, the result could adversely affect our ability
to generate net income or cash flows to make distributions and other payments in
respect of our shares.                                                          

THE  INABILITY TO MAINTAIN OUR RECURRING  FEE  ARRANGEMENTS  AND TO GENERATE NEW
TRANSACTION FEES COULD HAVE A NEGATIVE IMPACT ON OUR NET INCOME AND CASH FLOWS  

Two revenue  sources in our Fund  Management  segment are the  transaction  fees
generated by our  sponsorship  of new  investment  programs and  recurring  fees
payable  by  existing  and  future  programs.  Transaction  fees  are  generally
"up-front" fees that are generated:                                             

o    by the sponsorship of new investment programs; and               
o    upon investment of the capital raised in an investment program.  

Recurring fees are generated by the ongoing operation of investment  programs we
sponsor,  some of which have finite  lives.  The  termination  of one or more of
these recurring fee arrangements, or the inability to sponsor new programs which
will generate new recurring and  transaction  fees,  would reduce net income and
cash flows.  There can be no assurance that existing  recurring fee arrangements
will not be reduced or  terminated  or that we will be able to realize  revenues
from new investment programs.                                                   

14

10-K
15th Page of 151
TOC
1st
Previous
Next
Bottom
Just 15th

Likewise, the two principal revenue streams in our Mortgage Banking business are
fees we earn for originating loans and ongoing fees we earn for servicing loans.
A decline  in  origination  volume  or the loss or  termination  of a  servicing
arrangement  could  adversely  affect our results of  operations  and reduce net
income and cash flows.  There can be no assurance  that  existing  recurring fee
arrangements  will  not be  reduced  or  terminated  or  that we will be able to
realize revenues from new business.                                             

WE RELY UPON  RELATIONSHIPS  WITH KEY  INVESTORS  AND  DEVELOPERS  WHICH MAY NOT
CONTINUE                                                                        

We  rely  upon  relationships  with  key  investors  and  developers.  If  these
relationships  do not continue,  or if we are unable to form new  relationships,
our ability to generate  revenue will be adversely  affected.  In 2006, five key
investors  provided  approximately  76.6% of the  equity  capital  raised by tax
credit  syndication  programs  we  sponsored,  with  Fannie Mae and  Freddie Mac
together providing  approximately 32.4% of the equity capital. In addition,  ten
key developers provided approximately 45.5% of the LIHTC properties for which we
arranged equity financing in 2006. Further,  Fannie Mae and Freddie Mac were the
purchasers of 58.5% of the loans  originated by our Mortgage Banking business in
2006, while AMAC was the purchaser of 34.7% of the loans it originated.         

There can be no assurance  that we will be able to continue to do business  with
these key investors and  developers  or that new  relationships  will be formed.
Developers  may also  experience  financial  difficulties  that would,  in turn,
reduce the amount of business we transact with them. If developers were to fail,
it could also lead to some of the adverse  consequences  listed under the "THERE
ARE RISKS ASSOCIATED WITH THE PROPERTIES  UNDERLYING OUR FINANCING  PRODUCTS AND
INVESTMENTS  THAT COULD ADVERSELY  AFFECT OUR NET INCOME AND CASH FLOWS" section
above.                                                                          

We also rely upon  relationships  with  providers of products in which we invest
(e.g.  CMBS) and  investors  who  invest in the funds  which we  manage.  If our
relationships  with  CMBS  issuers,  Wall  Street  firms,  banks  and  insurance
companies who create and sell high yield debt  products  were to  terminate,  we
might not be able to obtain  product for our own balance sheet or funds which we
manage.                                                                         

By reason of their  regulated  status,  certain of our investors have regulatory
incentives  to invest in our  sponsored  investment  programs in addition to the
economic return from such investments. A change in such regulations could result
in determinations by such investors to seek other investment opportunities.     

REVENUES FROM OUR FEE-GENERATING ACTIVITIES AND OTHER INCOME FROM CERTAIN OF OUR
FINANCING  AND  INVESTING  PRODUCTS  ARE LESS  PREDICTABLE  THAN  THOSE FROM OUR
MORTGAGE  REVENUE BOND  INVESTMENTS AND COULD RESULT IN A DECREASE IN NET INCOME
AND CASH FLOWS,  FLUCTUATIONS  IN OUR SHARE PRICE AND A REDUCTION IN THE PORTION
OF OUR INCOME THAT IS TAX-EXEMPT                                                

In 2006,  approximately  21.7% of the revenue we  recognized in our statement of
income was derived from  fee-generating  service  activities through our taxable
subsidiaries. Fee-generating businesses are inherently less predictable than the
ownership of mortgage  revenue  bonds,  and there can be no  assurance  that the
fee-generating  activities will be profitable.  Additionally,  in 2006, 32.0% of
our income  before  income taxes was  generated by equity  income we earned from
funds we sponsor through ARCap. A significant portion of equity income we expect
to  generate  from  these  funds is based on  "promotes"  that we earn,  and the
occurrence of events that would trigger such earnings is not in our control.  In
addition,  the net  income  and cash  flows  generated  by our  Fund  Management
business  has  historically  fluctuated  between  quarters  due to  the  typical
variability in the timing of fund  sponsorships  and  investments  made by those
funds as well as  promotes  we earn from  certain  of those  investments.  These
fluctuations could be perceived negatively and, therefore,  adversely affect our
share  price.  Refer to Note 19 to our  consolidated  financial  statements  for
quarterly financial information.                                                

In addition,  the portion of our  distributions  that is  excludable  from gross
income for federal  income tax purposes  could decrease based on the size of our
future taxable business.  Our taxable  subsidiaries do not currently  distribute
dividend income to the parent trust but rather reinvest it in their  businesses.
If we invest in a larger  percentage of taxable  investments,  or if our taxable
subsidiaries were to distribute  dividend income to the parent trust, the result
would likely be that the taxable  portion of our overall income would  increase.
Also,  the  CMBS  fund  sponsorship  portion  of our  Fund  Management  business
generates income, most of which is taxable, and that income is passed through to
the parent trust. As that business  continues to grow, the percentage of our net
income  distributed to  shareholders  that is federally  tax-exempt  will likely
decrease.                                                                       

15

10-K
16th Page of 151
TOC
1st
Previous
Next
Bottom
Just 16th

HEIGHTENED COMPETITION MAY ERODE OUR EARNINGS                                   

We are subject to competition in all of our business lines, as described in Item
1. -  BUSINESS  -  COMPETITION.  As  competition  increases,  we may  experience
compression  in the level of  profits  we earn on our  various  investments  and
financing products due to, among other things:                                  

    o    Reductions in the rate of interest we earn on mortgage revenue bonds;
     o    Reductions  in  the  rates  of  origination  and  servicing  fees  for
mortgages;                                                  
     o    Reductions in the rate of fees we earn from  originating  and managing
funds; and                                                  
     o    Lower  levels of  discounts  at which  high-yield  investments  may be
purchased.                                                  

As we often borrow funds to make investments, rising interest rates may compound
this issue. Absent cost reductions,  such compression may not permit us to enjoy
the margins we have achieved historically, thereby lowering our revenues and net
income.                                                                         

THE ATTRACTIVENESS OF REAL ESTATE AS AN INVESTMENT MAY DECLINE                  

Real estate underlies all of our business lines, whether by direct investment or
by virtue of sponsoring funds that are associated with real estate.  While often
viewed  as an  attractive  investment  sector,  there is no  guarantee  that the
investors  in the  funds  we  sponsor  will  continue  to  allocate  capital  to
investments  associated  with real estate.  Should there be a general decline in
capital invested in the sector, our ability to sponsor funds would be diminished
and the income we earn from these activities would decline.                     

2. RISKS RELATED TO OUR PORTFOLIO INVESTING BUSINESS                            

WE HAVE NO RECOURSE  AGAINST STATE OR LOCAL  GOVERNMENTS OR PROPERTY OWNERS UPON
DEFAULT OF OUR  MORTGAGE  REVENUE  BONDS OR UPON THE  BANKRUPTCY  OF AN OWNER OF
PROPERTIES SECURING OUR MORTGAGE REVENUE BONDS                                  

Although state or local  governments or their agencies or authorities  issue the
mortgage  revenue bonds we purchase,  the mortgage revenue bonds are not general
obligations of any state or local  government.  No  government,  as an issuer of
these bonds,  is liable to make payments on the mortgage  revenue bonds,  nor is
the taxing  power of any  government  pledged  for the payment of  principal  or
interest on the mortgage revenue bonds. An assignment by the issuing  government
agency or authority of the mortgage loan in favor of a bond trustee on behalf of
us, or in some cases,  an assignment  directly to the  bondholder,  secures each
mortgage revenue bond we own. The mortgage loan is also secured by an assignment
of rents. Following the time that the properties securing the mortgage loans are
placed into service and achieve stabilized  occupancy,  the underlying  mortgage
loans are  non-recourse  to the property  owner,  other than customary  recourse
carve-outs   for  bad  acts,   such  as  fraud  and   breach  of   environmental
representations  and  covenants.  Accordingly,  the  revenue  derived  from  the
operation of the properties  securing the mortgage revenue bonds that we own and
amounts  derived  from  the  sale,  refinancing  or  other  disposition  of  the
properties  are the sole sources of funds for payment of principal  and interest
on the mortgage revenue bonds.                                                  

Our  revenue  may  be  adversely  affected  by the  bankruptcy  of an  owner  of
properties  securing the mortgage  revenue  bonds that we directly or indirectly
own. An owner of properties under bankruptcy  protection may be able forcibly to
restructure its debt service  payments and stop making debt service  payments to
us,  temporarily  or  otherwise.  Our rights in this  event  would be defined by
applicable law.                                                                 

WE ARE SUBJECT TO CONSTRUCTION  COMPLETION AND  REHABILITATION  RISKS THAT COULD
ADVERSELY AFFECT OUR EARNINGS                                                   

As of December 31, 2006,  mortgage revenue bonds with an aggregate fair value of
approximately  $277.5  million were secured by  affordable  multifamily  housing
properties  which  are still in  various  stages of  construction  and  mortgage
revenue bonds with an aggregate fair value of approximately  $488.6 million were
secured  by  affordable  multifamily  housing  properties  which are  undergoing
substantial  rehabilitation.  Construction and/or substantial  rehabilitation of
such properties  generally lasts  approximately  12 to 24 months.  The principal
risk  associated  with this type of  lending  is the risk of  non-completion  of
construction or rehabilitation which may arise as a result of:                  

o    underestimated construction or rehabilitation costs;             
o    delays;                                                          
o    failure to obtain governmental approvals; and                    

16

10-K
17th Page of 151
TOC
1st
Previous
Next
Bottom
Just 17th

     o    adverse  weather  and other  unpredictable  contingencies  beyond  the
control of the developer.                                   

If construction  and/or  rehabilitation of a property is not timely completed as
required  in the  mortgage  loan  documents,  we, as the holder of the  mortgage
revenue bonds secured by such mortgage,  may incur certain costs and be required
to invest additional capital in order to preserve our investment.               

THE  PROPERTIES  SECURING  CERTAIN  OF OUR  MORTGAGE  REVENUE  BONDS,  WHICH ARE
CURRENTLY IN CONSTRUCTION,  LEASE-UP OR  REHABILITATION  STAGES,  MAY EXPERIENCE
FINANCIAL  DISTRESS  IF THEY DO NOT MEET  OCCUPANCY  AND DEBT  SERVICE  COVERAGE
LEVELS SUFFICIENT TO STABILIZE SUCH PROPERTIES,  NEGATIVELY AFFECTING OUR ASSETS
AND EARNINGS                                                                    

As of December 31, 2006,  mortgage  revenue bonds in our  portfolio  with a fair
value of  approximately  $1.6 billion were secured by mortgages on properties in
construction,   lease-up  or  rehabilitation   stages.  The  lease-up  of  these
underlying  properties may not be completed on schedule or at  anticipated  rent
levels,  resulting  in a greater  risk that they may go into  default than bonds
secured by mortgages on properties  that are fully  leased-up.  Should a bond go
into default,  we may not receive  interest  income,  which would reduce our net
income and cash flows.  Moreover,  there can be no assurance that the underlying
property will achieve expected occupancy or debt service coverage levels.       

CERTAIN OF OUR MORTGAGE  REVENUE  BONDS WE AND OUR  SUBSIDIARIES  HOLD HAVE BEEN
PLEDGED                                                                         

A significant portion of our mortgage revenue bond portfolio has been pledged as
collateral  in connection  with our  securitizations  and credit  intermediation
activities  and we may not have full  access to them  until we exit the  related
programs.  The fair value of the pledged  bonds varies from time to time.  As of
December 31, 2006,  the fair value of all pledged bonds was  approximately  $2.3
billion.                                                                        

RISK ASSOCIATED WITH  SECURITIZATION  COULD ADVERSELY  AFFECT OUR NET INCOME AND
CASH FLOWS                                                                      

Through  securitizations,   we  seek  to  enhance  our  overall  return  on  our
investments and to generate  proceeds that,  along with operating cash flows and
equity offering proceeds,  facilitate the acquisition of additional investments.
In our  variable  rate  securitizations,  a bank or  another  type of  financial
institution  provides  liquidity to the  purchasers  of senior  interests in our
mortgage  revenue bonds.  They also provide certain credit  intermediation  with
respect to the underlying revenue bond, which enables the senior interests to be
sold to investors seeking  investments with credit ratings of at least "A" short
term and "AA" long term.  The  liquidity  facilities  are generally for one-year
terms and are renewable annually. If the credit strength of either the liquidity
or credit intermediation  providers deteriorates,  we anticipate that the return
on the residual  interests would decrease,  negatively  affecting our net income
and subsequent executions.  In addition, if we are unable to renew the liquidity
or credit  intermediation  facilities,  we would be  forced to find  alternative
(possibly more expensive)  facilities,  to repurchase the underlying bonds or to
liquidate the underlying bonds and our investment in the residual interests.  If
we were forced to liquidate an investment, we would recognize gains or losses on
the liquidation,  which might be significant depending on market conditions.  As
of December 31, 2006:                                                           

     o    Merrill  Lynch  provided   liquidity  for  senior  interests  with  an
          aggregate  amount of $403.4  million  in the  P-FLOATs/RITES  program.
          There is a risk that the  program may not be renewed at the end of its
current term;                                               
     o    Goldman  Sachs  provided   liquidity  for  senior  interests  with  an
          aggregate   amount   of   $944.8   million   in  the   Goldman   Sachs
          Floats/Residuals  program. There is a risk that the program may not be
renewed at the end of its current term; and                 
     o    Primary   credit    intermediation   on   the    P-FLOATs/RITES    and
          Floaters/Residuals programs is generally provided by Centerbrook, with
          IXIS  serving  as  the  secondary  credit  intermediator.  In  certain
          circumstances  Merrill  Lynch or IXIS  are the  primary  or  secondary
credit intermediator.                                       

OTHER  PARTIES  HAVE THE FIRST RIGHT TO CASH FLOW FROM OUR  SECURITIZED  REVENUE
BOND INVESTMENTS                                                                

Because of our  utilization of  securitizations,  our interests in a significant
portion of our mortgage  revenue bond  investments  are  subordinated  or may be
junior in right of payment to other senior securities. There are risks in owning
"junior residual  interests" that could adversely affect our net income and cash
flows, including:                                                               

17

10-K
18th Page of 151
TOC
1st
Previous
Next
Bottom
Just 18th

     o    the risk that borrowers may not be able to make payments, resulting in
          us,  as  the  holder  of  the  junior  residual  interests,  receiving
          principal  and  interest  payments  that are less than  expected or no
payment at all;                                             
     o    the risk  that  short-term  interest  rates  may  rise  significantly,
          increasing  the amounts  payable to the  holders of the  floating-rate
          senior interests created through our  securitizations and reducing the
         amounts payable to us as holder of the junior residual interests; and
     o    the risk that the  holders of the  senior  mortgage  revenue  bonds or
          senior interests may control the ability to enforce remedies, limiting
 our ability to take actions that might protect our interests.

OUR MORTGAGE REVENUE BONDS MAY BE CONSIDERED USURIOUS                           

State  usury  laws  establish  restrictions,  in certain  circumstances,  on the
maximum rate of interest that may be charged by a lender and impose penalties on
parties making  usurious  loans,  including  monetary  penalties,  forfeiture of
interest  and  unenforceability  of the debt.  There is a risk that our mortgage
revenue  bonds  could be found to be usurious  as a result of  uncertainties  in
determining  the  maximum  legal  rate of  interest  in  certain  jurisdictions,
especially  with respect to mortgage  revenue bonds that bear  participating  or
otherwise contingent interest.  Therefore,  the amount of interest to be charged
and the return on our  mortgage  revenue  bonds  would be limited by state usury
laws and we may have to agree to defer or reduce the amount of interest that can
be paid in any particular year  (potentially to zero).  Some states may prohibit
the  compounding  of interest,  in which case we may have to agree to forego the
compounding feature of our mortgage revenue bonds originated in those states.   

OUR INVESTMENTS IN MORTGAGE REVENUE BONDS LACK LIQUIDITY                        

Our investments in mortgage  revenue bonds lack a regular trading market.  There
is no limitation in our trust agreement or otherwise as to the percentage of our
investments  that may be illiquid and we expect to continue to invest in assets,
substantially  all of which will be illiquid  securities.  If a situation arises
where we require additional cash, we could be forced to liquidate some or all of
our  investments  on  unfavorable  terms (if any sale is  possible)  that  could
substantially reduce the amount of distributions  available and payments made in
respect of our shares.                                                          

MORTGAGE  REVENUE  BONDS MAY GO INTO  DEFAULT  FROM TIME TO TIME AND  NEGATIVELY
AFFECT OUR NET INCOME AND CASH FLOWS                                            

Properties  underlying  our  mortgage  revenue  bonds may  experience  financial
difficulties  from time to time,  which  could  cause  certain  of our  mortgage
revenue  bonds to go into  default.  Were that to occur,  we might take remedial
action such as,  among other  things,  entering  into a work-out or  forbearance
agreement  with the owner of the property or exercising  our rights with respect
to  the  collateral   securing  such  mortgage   revenue  bond,   including  the
commencement of mortgage foreclosure proceedings. In addition, in the event that
we were to successfully foreclose the mortgage on the underlying property, it is
likely that,  during the period that we or an affiliate  owned both the property
and the defaulted bond, we, as holder of the defaulted bond,  would be deemed to
be a related party to a "substantial user" of the property underlying such bond.
As a result,  during such  period,  the interest we receive on the bond would be
taxable.   See  "SUBSTANTIAL   USER"  LIMITATION  within  "RISKS  ASSOCIATED  TO
APPLICATION OF TAX LAWS" below.                                                 

3. RISKS RELATED TO OUR FUND MANAGEMENT BUSINESS                                

THERE ARE RISKS ASSOCIATED WITH CREDIT INTERMEDIATION AND COMMITMENTS TO PROVIDE
SPECIFIED RATES OF RETURN THAT EXPOSE US TO LOSSES                              

Through our taxable  subsidiaries,  we provide  credit  intermediation  to third
parties for a fee. If such third parties default on their  obligations for which
we provided credit intermediation,  our loss would likely be in an amount far in
excess  of the fee  paid  to us for  providing  the  service.  We  also  provide
specified internal rates of return to investors in partnerships designed to pass
through tax benefits,  including LIHTCs,  to investors.  In connection with such
transactions  we might be required to advance funds to ensure that the investors
do not lose their  expected tax benefits  and, if the internal rate of return to
investors  falls  below the  specified  level,  we would be  required  to make a
payment so that the  specified  rate of return  will be  achieved.  Our  maximum
potential  liability  pursuant to those transactions is detailed in MANAGEMENT'S
DISCUSSION  AND  ANALYSIS - OFF BALANCE  SHEET  ARRANGEMENTS  and Note 21 to the
consolidated financial statements.                                              

18

10-K
19th Page of 151
TOC
1st
Previous
Next
Bottom
Just 19th

THERE IS A RISK OF  ELIMINATION  OF, OR CHANGES TO,  GOVERNMENTAL  PROGRAMS THAT
COULD LIMIT OUR PRODUCT OFFERINGS                                               

A  significant  portion of our Fund  Management  revenues  is  derived  from the
syndication of partnership  interests in partnerships  that invest in properties
eligible for LIHTCs which are a provision of the Internal  Revenue Code of 1986,
as amended (the "Code").                                                        

Section 42 of the Code  authorizes  federal  LIHTCs for  affordable  multifamily
rental housing.  Under this program,  a project either receives an allocation of
federal LIHTCs from an agency designated by the government of the state in which
the project is located or the project is entitled to the LIHTCs by reason of its
being  financed by volume cap  mortgage  revenue  bonds.  There are two types of
credits:                                                                        

     o    4% credits - for new  buildings and existing  buildings  financed with
          mortgage  revenue  bonds that receive an allocation of the volume cap,
          or for new and existing buildings  financed with below-market  federal
          financing  that  receive an  allocation  of federal  LIHTCs from state
agencies; and                                               
     o    9% credits - for new  buildings  that receive an allocation of federal
LIHTCs from state agencies.                                 

The credits are taken over a period of 10 years,  which can span over an 11-year
operating  period.  The credit  amount is based on the  qualified  basis of each
building,  which is based upon the adjusted basis of the building  multiplied by
the percentage of units in the building leased to low-income tenants.           

In order to qualify for the federal LIHTC,  the property must comply with either
of the  20/50  or 40/60  tests  that  apply to  tax-exempt  bonds.  However,  in
addition,  the  amount  of rent that may be  charged  to  qualifying  low-income
tenants  cannot exceed 30% of the "imputed  income" for each unit,  i.e., 30% of
the imputed  income of a family  earning 50% or 60% of area  median  income,  as
adjusted for family size. Failure to comply continuously with these requirements
throughout  the 15 year  recapture  period  could  result in a recapture  of the
federal LIHTCs.  In addition,  if the rents from the property are not sufficient
to pay debt service on the mortgage revenue bonds or other financing  secured by
the property and a default ensues,  the initial borrower could lose ownership of
the project as the result of  foreclosure  of the mortgage.  In such event,  the
initial  equity  investors  would no longer  be  entitled  to claim the  federal
LIHTCs, but the foreclosing lender could claim the remaining LIHTCs provided the
project  continues to be operated in accordance with the requirements of Section
42. As a result,  there is a strong  incentive for the federal LIHTC investor to
ensure  that the  development  is current  on debt  service  payments  by making
additional capital contributions or otherwise.                                  

With respect to most of the properties,  substantially all the multifamily units
are rented to individuals or families earning no greater than 60% of area median
income  and,  thus,  substantially  all of the  qualified  basis  may be used to
determine the amount of the federal  LIHTC.  This maximizes the amount of equity
raised  from the  purchasers  of the  federal  LIHTCs for each  development  and
provides for the maximum  amount of rent that can be obtained from tenants where
there is currently strong occupancy demand.                                     

Investors in CharterMac  Capital LIHTC  sponsored  funds are usually Fortune 500
corporations  that  have  projected  long-term  positive  tax  positions.  These
investors  generally become limited partners in the CharterMac Capital sponsored
fund which, in turn, invests as a limited partner in the  developer/owner of the
affordable  housing property.  The CharterMac Capital sponsored fund contributes
to the  developer/owner  the  negotiated  equity paid over time.  In the case of
properties utilizing 4% credits,  this contribution will usually provide between
25% and  35% of the  costs  of the  development.  For  properties  utilizing  9%
credits,  this contribution will usually provide between 45% and 55% of the cost
of the development.                                                             

Although  LIHTCs are a part of the Code,  Congress  could  repeal or modify this
legislation  at any  time or  modify  the tax  laws so that  the  value of LIHTC
benefits is reduced. If such legislation is repealed or adversely  modified,  we
would no longer be able to pursue this portion of our business strategy.        

CERTAIN AGREEMENTS  PURSUANT TO WHICH WE EARN FEES HAVE FINITE TERMS AND MAY NOT
BE RENEWED WHICH COULD NEGATIVELY AFFECT OUR NET INCOME AND CASH FLOWS          

We receive  fees  pursuant to an advisory  agreement  with AMAC,  an  affiliated
company.  This advisory  agreement is subject to annual  renewal and approval by
the  independent  trustees of AMAC and there is no guarantee  that the agreement
will be renewed.                                                                

19

10-K
20th Page of 151
TOC
1st
Previous
Next
Bottom
Just 20th

We also receive fees from investment funds we sponsor.  These funds generally do
not  require or  authorize  their  investors  to approve  the funds'  management
arrangements with us; instead, we will generally acquire  controlling  interests
in the entities which control these funds. However,  these interests are subject
to the  fiduciary  duty of the  controlling  entity  to the  investors  in those
programs,  which may affect our ability to  continue to collect  fees from those
funds. Furthermore, the organizational documents of certain of these funds allow
for the  investors,  at their option,  to remove the entity  controlled by us as
general  partner or  managing  member  without  cause.  Although  the funds will
generally be required to pay fair market value if they exercise this right,  our
right to receive future fees would  terminate and there can be no assurance that
the payment will fully compensate us for this loss. Finally, many of these funds
typically have finite periods in which they are scheduled to exist,  after which
they are  liquidated.  The termination of a fund will result in a termination of
the fees we receive from it.                                                    

OUR ROLE AS A SPONSOR OF INVESTMENT  FUNDS AND  CO-DEVELOPER OF LIHTC PROPERTIES
EXPOSES US TO RISKS OF LOSS                                                     

In  connection  with the  sponsorship  of  investment  funds and  joint  venture
activities for co-development of LIHTC properties,  we act as a fiduciary to the
investors in our  syndication  programs  and are often also  required to provide
performance guarantees. We advance funds to acquire interests in property-owning
partnerships for inclusion in investment programs and, at any point in time, the
amount of funds  advanced can be material.  Recovery of these amounts is subject
to our ability to attract investors to new investment funds or, if investors are
not found, the sale of the partnership  interests in the underlying  properties.
We could also be liable to investors in investment programs and third parties as
a result of  serving as general  partner or special  limited  partner in various
investment  funds.  In addition,  even when we are not required to do so, we may
advance funds to allow  investment  funds to meet their expenses and/or generate
the expected tax benefits to investors.                                         

FUNDS  MAY  NOT  GENERATE  SUFFICIENT  CASH TO PAY  FEES  DUE TO US,  WHICH  MAY
NEGATIVELY IMPACT OUR NET INCOME AND CASH FLOWS                                 

Much of the  revenue in our Fund  Management  business  is earned from fees that
upper-tier funds we sponsor pay to our subsidiaries for services rendered. These
funds are dependent upon the cash flows of lower-tier partnerships in which they
invest  to  generate  their  own cash  flows  that are used to pay such fees for
services,  such as asset  management  and advisory  services.  As the lower-tier
partnerships are susceptible to numerous operational risks (see "THERE ARE RISKS
ASSOCIATED WITH THE PROPERTIES UNDERLYING OUR FINANCING PRODUCTS AND INVESTMENTS
THAT  COULD  ADVERSELY  AFFECT  OUR NET  INCOME  AND  CASH  FLOWS"  above),  the
upper-tier funds may not collect sufficient cash to pay the fees they owe to us.
If we do not receive these fees, the negative impact on our cash flows,  and our
net income if we determine the fees are not collectible, could negatively impact
our business.                                                                   

4. RISKS RELATED TO OUR MORTGAGE BANKING BUSINESS                               

THERE ARE RISKS OF LOSS  ASSOCIATED  WITH OUR  MORTGAGE  ORIGINATIONS  WHICH MAY
NEGATIVELY IMPACT OUR NET INCOME AND CASH FLOWS                                 

In our DUS program, we originate loans through one of our subsidiaries which are
thereafter  purchased or credit enhanced by Fannie Mae. For most of these loans,
we retain a first loss position with respect to loans that we originate and sell
under this program. For these loss sharing loans, we assume responsibility for a
portion of any loss that may result from borrower defaults,  based on the Fannie
Mae loss  sharing  formulas,  and risk  Levels  I, II,  or III.  Of the 865 loss
sharing loans in this program as of December 31, 2006,  all but one were Level I
loans. For such loans, if a default occurs,  we are responsible for the first 5%
of the unpaid  principal  balance  and a portion of any  additional  losses to a
maximum of 20% of the original principal balance; any remaining loss is borne by
Fannie  Mae.  In Level II and  Level III  loans we carry a higher  loss  sharing
percentage.                                                                     

Under the terms of our master  loss  sharing  agreement  with Fannie Mae, we are
responsible for funding 100% of mortgagor  delinquency  (principal and interest)
and  servicing  (taxes,  insurance and  foreclosure  costs)  advances  until the
amounts  advanced  exceed  5% of the  unpaid  principal  balance  at the date of
default.  Thereafter,  for Level I loans,  we may request  interim  loss sharing
adjustments  which allow us to fund 25% of such advances until final  settlement
under the master loss sharing  agreement.  No interim  sharing  adjustments  are
available for Level II and Level III loans.                                     

We also participate in loss sharing transactions under Freddie Mac's DUI program
whereby we originate loans that are purchased by Freddie Mac.                   

20

10-K
21st Page of 151
TOC
1st
Previous
Next
Bottom
Just 21st

Under the terms of our master  agreement  with Freddie Mac, we are  obligated to
reimburse  Freddie Mac for a portion of any loss that may result  from  borrower
defaults on DUI transactions.  For such loans, if a default occurs, our share of
the loss will be the first 5% of the  unpaid  principal  balance  and 25% of the
next 20% of the remaining  unpaid  principal  balance to a maximum of 10% of the
unpaid  principal  balance.  The loss on a defaulted  loan is  calculated as the
unpaid principal amount due, unpaid interest due and default  resolutions  costs
(taxes, insurance, operation and foreclosure costs) less recoveries.            

Our maximum  "first loss" exposure under the DUS and DUI programs is detailed in
MANAGEMENT'S  DISCUSSION AND ANALYSIS - OFF BALANCE SHEET  ARRANGEMENTS and Note
21 to the consolidated financial statements.                                    

CHANGES IN EXISTING  GOVERNMENT  SPONSORED AND FEDERAL  MORTGAGE  PROGRAMS COULD
NEGATIVELY AFFECT OUR MORTGAGE BANKING BUSINESS                                 

Our  ability  to  generate  revenue  through  mortgage  sales  to  institutional
investors  largely depends on programs  sponsored by Fannie Mae and Freddie Mac,
which  facilitate  the issuance of  mortgage-backed  securities in the secondary
market. Any  discontinuation  of, or significant  reduction in, the operation of
those  programs  could have a material  adverse  effect on our mortgage  banking
business and results of operations.  Also, any significant adverse change in the
level of activity in the secondary market or the underwriting  criteria of these
entities would reduce our revenues.                                             

THE LOSS OF OUR  RELATIONSHIPS  WITH GSES AND RELATED  ENTITIES COULD  ADVERSELY
AFFECT OUR BUSINESS                                                             

Our agreements  with Fannie Mae and Freddie Mac afford us a number of advantages
and may be canceled by the counterparty  for cause.  Cancellation of one or more
of these  agreements  would  have a  material  adverse  affect on our  operating
results and could result in further  disqualification with other counterparties,
loss of technology and other materially adverse consequences.                   

AS A MORTGAGE LENDER, WE MUST COMPLY WITH NUMEROUS LICENSING  REQUIREMENTS,  AND
OUR INABILITY TO REMAIN IN COMPLIANCE  WITH SUCH  REQUIREMENTS  COULD  ADVERSELY
AFFECT OUR OPERATIONS AND OUR REPUTATION GENERALLY                              

Like other  mortgage  banking  companies,  we must  comply  with the  applicable
licensing and other regulatory requirements of each jurisdiction in which we are
authorized to lend. These requirements are complex and vary from jurisdiction to
jurisdiction. From time to time we are subject to examination by regulators and,
if  it is  determined  that  we  are  not  in  compliance  with  the  applicable
requirements,  we  may be  fined,  and  our  license  to  lend  in  one or  more
jurisdictions may be suspended or revoked.                                      

IF OUR LOAN SERVICING PORTFOLIO  DECREASES,  OUR NET INCOME AND CASH FLOWS WOULD
BE NEGATIVELY AFFECTED                                                          

A large  portion of our  revenues in the  Mortgage  Banking  business  relate to
recurring  fees for servicing  mortgages we originate or those for which we have
sub-servicing  agreements.  Loans in our  portfolio  are  subject  to  maturity,
prepayments, defaults and refinancing after which we may not recapture the loan.
Upon these events,  our portfolio would decline,  depriving us of the associated
revenue stream.  This, in turn, would negatively  affect our net income and cash
flows.                                                                          

PROPOSED  CHANGES TO ACCOUNTING  RULES COULD  ADVERSELY  AFFECT OUR REPORTED NET
INCOME                                                                          

During 2005, the Financial  Accounting Standards Board issued proposed revisions
to its Standard No. 140,  ACCOUNTING  FOR  TRANSFERS  AND SERVICING OF FINANCIAL
ASSETS AND  EXTINGUISHMENTS  OF  LIABILITIES,  which governs the accounting for,
among  other  things,   the  origination   and  sale  of  mortgage  loans.   One
interpretation  of the  proposed  changes  may call into  question  whether  the
mortgages we originate and sell under the DUS and DUI programs may be recognized
as sales for accounting  purposes.  Should that interpretation  become a part of
any  final  accounting  standard  issued,  it is  possible  that we may  have to
continue  to carry such loans on our  balance  sheet as assets,  account for the
proceeds  received as debt and not recognize  certain  mortgage  banking fees as
revenues  upon  the  sale as we do  currently.  Such  accounting  changes  would
decrease our reported net income,  which may negatively  affect our share price.
In addition,  the potential decline in net income and the likely increase in our
level of reported debt may cause non-compliance with debt covenants.            

21

10-K
22nd Page of 151
TOC
1st
Previous
Next
Bottom
Just 22nd

Additionally,  other changes  contemplated  could  eliminate the  designation of
"Qualified  Special Purpose Entities"  ("QSPEs") which are a standard element of
securitization transactions,  particularly within the CMBS industry. Should such
a change be effected,  there could be a negative  impact on our Fund  Management
business.                                                                       

5. RISKS RELATED TO APPLICATION OF TAX LAWS                                     

OUR CLASSIFICATION AS A PUBLICLY TRADED PARTNERSHIP NOT TAXABLE AS A CORPORATION
IS NOT FREE FROM DOUBT AND COULD BE CHALLENGED                                  

We, and all of our Portfolio Investing subsidiaries,  operate as partnerships or
are disregarded for federal income tax purposes.  This allows us to pass through
our income,  including our federally  tax-exempt  income,  and deductions to our
shareholders.  The listing of our common  shares on the New York Stock  Exchange
causes us to be treated as a "publicly  traded  partnership"  for federal income
tax purposes. We and our counsel,  Paul, Hastings,  Janofsky & Walker LLP ("Paul
Hastings"),  believe that we have been and are properly treated as a partnership
for federal income tax purposes.  However,  the Internal Revenue Service ("IRS")
could  challenge  our  partnership  status  and we could  fail to  qualify  as a
partnership in years that are subject to audit or in future years. Qualification
as  a  partnership   involves  the  application  of  numerous   technical  legal
provisions. For example, a publicly traded partnership is generally taxable as a
corporation unless 90% or more of its gross income is "qualifying" income (which
includes interest,  dividends, real property rents, gains from the sale or other
disposition of real property, gain from the sale or other disposition of capital
assets  held for the  production  of interest or  dividends,  and certain  other
items).  We have  represented  that in all prior years of our existence at least
90% of our gross  income was  qualifying  income  and we intend to  conduct  our
operations  in a  manner  such  that  at  least  90% of our  gross  income  will
constitute  qualifying  income in the  current  year and in the  future.  In the
opinion of Paul  Hastings,  although  the issue is not free from doubt,  we have
been and are properly treated as a partnership for federal income tax purposes. 

In  determining  whether  interest is treated as  qualifying  income under these
rules,  interest income derived from a "financial business" and income and gains
derived by a "dealer" in  securities  are not treated as qualifying  income.  We
have  represented that we are acting as an investor with respect to our mortgage
revenue  bond  investments  and that we have not engaged in, and will not engage
in,  a  financial  business,  although  there  is  no  clear  guidance  on  what
constitutes a financial  business  under the tax law. We have taken the position
that  for  purposes  of  determining  whether  we are in a  financial  business,
portfolio  investing  activities  that  we  are  engaged  in  now  and  that  we
contemplate  engaging  in  prospectively  would not cause us to be  engaged in a
financial  business or to be considered a "dealer" in securities.  The IRS could
assert that our activities  constitute a financial  business.  If our activities
constitute (or as a result of increased volume  constitute) a financial business
or cause us to be treated  as a dealer,  there is a  substantial  risk that more
than 10% of our gross income would not constitute  qualifying  income.  We could
also be treated as if we were engaged in a financial  business if the activities
of CM Corp. and its  subsidiaries  were  attributed to us and were determined to
constitute a financial business. CM Corp.,  including its principal subsidiaries
CharterMac Capital and CMC, is subject to income tax on its income. Accordingly,
we believe the activities and income of CM Corp. and its  subsidiaries  will not
be attributed to CharterMac for purposes of determining CharterMac's tax status.
In addition,  in determining  whether interest is treated as qualifying  income,
interest  income  that is  determined  based  upon the  income or profits of any
person is not treated as qualifying income. A portion of the interest payable on
participating  interest bonds owned by us is determined based upon the income or
profits of the properties securing our investments.  Accordingly,  if we were to
receive  more  than  10%  of our  gross  income  in any  given  year  from  such
"contingent interest," the IRS could take the position that we should be treated
as a  publicly  traded  partnership  taxable as a  corporation.  There can be no
assurance  that such  monitoring  would be  effective in all events to avoid the
receipt of contingent interest and any other non-qualifying  income in any given
year that exceeds 10% of our gross income because  circumstances  outside of our
(or our subsidiaries) control could cause such a result.                        

If, for any reason,  less than 90% of our gross  income  constitutes  qualifying
income, items of income and deduction would not pass through to our shareholders
and our  shareholders  would be  treated  for  federal  income tax  purposes  as
stockholders  in a  corporation.  We  would be  required  to pay  income  tax at
corporate  rates  on any  portion  of our net  income  that  did not  constitute
tax-exempt income. In addition, a portion of our federally tax-exempt income may
be included in determining our alternative minimum tax liability.  Distributions
by us to our  shareholders  would  constitute  dividend  income  taxable to such
holders  to  the  extent  of our  earnings  and  profits,  which  would  include
tax-exempt  income, as well as any taxable income we might have, and the payment
of these  distributions  would not be deductible by us. These consequences would
have a  material  adverse  effect on us, our  shareholders  and the price of our
shares.                                                                         

22

10-K
23rd Page of 151
TOC
1st
Previous
Next
Bottom
Just 23rd

OUR  TREATMENT  OF INCOME FROM OUR RESIDUAL  INTERESTS  AS FEDERALLY  TAX-EXEMPT
COULD BE CHALLENGED                                                             

We hold, indirectly, residual interests in certain federally tax-exempt mortgage
revenue  bonds  through  securitization  programs,  such  as the  P-FLOATs/RITES
program,  which  entitle us to a share of the federally  tax-exempt  interest of
such mortgage  revenue bonds.  Special tax counsel have each rendered an opinion
to the effect that the issuer of the RITES and similar  instruments will each be
classified as a partnership  for federal  income tax purposes and the holders of
the  RITES  and  similar  instruments  will  be  treated  as  partners  of  each
partnership.  Consequently,  as the holder of the RITES and similar instruments,
we treat our share of the federally  tax-exempt income allocated and distributed
to us as federally tax-exempt income. However, it is possible that the IRS could
disagree with those conclusions and an alternative  characterization could cause
income from the RITES and similar  instruments to be treated as ordinary taxable
income. If such an assertion of an alternative  characterization  prevailed,  it
would materially adversely affect us and our shareholders.                      

THERE IS A RISK THAT THE IRS WILL  DISAGREE  WITH OUR  JUDGMENT  WITH RESPECT TO
ALLOCATIONS                                                                     

We  use  various   accounting  and  reporting   conventions  to  determine  each
shareholder's  allocable share of income,  including any market discount taxable
as ordinary income, gain, loss and deductions. Our allocation provisions will be
respected for federal  income tax purposes  only if they are  considered to have
"substantial  economic effect" or are in accordance with the partners' "interest
in the  partnership."  There is no  assurance  that the IRS will  agree with our
various accounting methods, conventions and allocation provisions,  particularly
our allocation of adjustments to  shareholders  attributable  to the differences
between the  shareholders'  purchase  price of common shares and their shares of
our tax basis in our assets, pursuant to an election we made.                   

THE STRUCTURE OF OUR ACQUISITIONS COULD BE CHALLENGED                           

Our acquisitions of CharterMac Capital and other subsidiaries were structured to
prevent us from realizing active income from these businesses and effectively to
receive a tax deduction (via the  allocation of subsidiary  income) for payments
made to its selling principals. It is possible that the IRS could challenge this
structure, with material adverse consequences to us. First, the IRS could assert
that we, as the parent trust, are the owner of these  businesses,  in which case
the parent trust would  realize an amount of active  income from them that would
require  it  to  be  treated  as a  corporation  instead  of a  publicly  traded
partnership for income tax purposes. If the IRS prevailed,  we would be required
to pay taxes on that income,  thereby  reducing the amount  available  for us to
make distributions. As a result, it is likely that the value of our shares would
decline.  Second,  the IRS might assert that the Special Common Units  ("SCUs"),
Special  Membership Units ("SMUs") and Special Common Interests ("SCIs") held by
the selling  principals of the businesses and others are actually  shares of our
Company.  If this position  prevailed,  the  distributions  payable on the units
would not reduce the taxable income of CM Corp. In such event, CM Corp. would be
subject to increased tax, which could reduce our net income,  our cash flows and
our  distributions,  which could also result in a decrease in the portion of our
distributions  that is  excluded  from  gross  income  for  federal  income  tax
purposes.                                                                       

THE TAXABILITY OF OUR INCOME DEPENDS UPON THE APPLICATION OF TAX LAWS THAT COULD
BE CHALLENGED                                                                   

The following  discussion  relates only to the portion of our investments  which
generate federally tax-exempt income.                                           

TAX-EXEMPTION OF OUR MORTGAGE REVENUE BONDS                           

     On the date of original  issuance or re-issuance  of each mortgage  revenue
     bond,  nationally  recognized bond counsel or special tax counsel  rendered
     its  opinion to the effect  that,  based on the law in effect on that date,
     interest   on   such   mortgage    revenue   bonds   is   excludable   from
     federally-taxable  gross  income,  except with  respect to any revenue bond
     (other  than a  revenue  bond,  the  proceeds  of  which  are  loaned  to a
     charitable  organization described in Section 501(c)(3) of the Code) during
     any  period  in which it is held by a  "substantial  user" of the  property
     financed  with the proceeds of such  mortgage  revenue  bonds or a "related
     person" of such a  "substantial  user." Each opinion  speaks only as of the
     date it was delivered.  In addition,  in the case of mortgage revenue bonds
     which,  subsequent  to their  original  issuance,  have been  reissued  for
     federal tax  purposes,  nationally  recognized  bond counsel or special tax
     counsel  has  delivered  opinions  that  interest on the  reissued  bond is
     excludable from federally-taxable  gross income of the holder from the date
     of re-issuance  or, in some cases,  to the effect that the  re-issuance did
     not adversely affect the  excludability of interest on the mortgage revenue

23

10-K
24th Page of 151
TOC
1st
Previous
Next
Bottom
Just 24th

     bonds from the gross income of the holders thereof.  However, an opinion of
     counsel has no binding  effect and there is no assurance  that the IRS will
     not contest these conclusions or, if contested, that they will be sustained
by a court.                                                           

     The Code establishes  certain  requirements which must be met subsequent to
     the issuance and delivery of tax-exempt mortgage revenue bonds for interest
     on such mortgage revenue bonds to remain excludable from  federally-taxable
     gross income.  Among these continuing  requirements are restrictions on the
     investment  and use of the revenue bond proceeds and, for mortgage  revenue
     bonds  the  proceeds  of which  are  loaned  to a  charitable  organization
     described in Section  501(c)(3) of the Code, the continued exempt status of
     such  borrower.  In addition,  there is a requirement  that the property be
     operated as a rental property and that during the Qualified  Project Period
(defined below) at least either:                                      

     o    20% of the units  must be  rented to  individuals  or  families  whose
          income is less than 50% of the area  median  gross  income (the "20/50
test"); or                                                  
     o    40% of the units  must be  rented to  individuals  or  families  whose
          income is less than 60% of the area  median  gross  income (the "40/60
test");                                                     

     in each case with adjustments for family size. The Qualified Project Period
     begins when 10% of the units in the property are first occupied and ends on
the latest of the date:                                               

(i)  which is 15 years after 50% of the units are occupied;           
(ii) on which all the bonds have been retired; or                     
     (iii) on which any assistance  provided under Section 8 of the U.S. Housing
Act of 1937 terminates.                                     

     Continuing  requirements also include regulatory  agreement  compliance and
     compliance with rules pertaining to arbitrage.  Each issuer of the mortgage
     revenue bonds, as well as each of the underlying borrowers,  has covenanted
     to  comply  with  certain  procedures  and  guidelines  designed  to ensure
     satisfaction of the continuing  requirements of the Code. Failure to comply
     with these  continuing  requirements  of the Code may cause the interest on
     such bonds to be includable in federally-taxable gross income retroactively
     to the date of  issuance,  regardless  of when such  noncompliance  occurs.
     Greenberg  Traurig,  LLP (also  referred to as "Greenberg  Traurig") as our
     bond counsel,  and Paul  Hastings,  as our  securities  counsel  (Greenberg
     Traurig  and Paul  Hastings  are  collectively  referred  to  herein as our
     "Counsel"),  have not, in connection  with this filing,  passed upon and do
     not assume any  responsibility  for, but rather have assumed the continuing
     correctness  of,  the  opinions  of bond  counsel or  special  tax  counsel
     (including   opinions  rendered  by  Greenberg  Traurig)  relating  to  the
     exclusion from  federally-taxable  gross income of interest on the mortgage
     revenue  bonds and have not  independently  verified  whether any events or
     circumstances have occurred since the date such opinions were rendered that
would adversely affect the conclusions set forth herein.              

"SUBSTANTIAL USER" LIMITATION                                         

     Interest on a mortgage  revenue bond we own, other than a bond the proceeds
     of which are  loaned to a  charitable  organization  described  in  Section
     501(c)(3) of the Code,  will not be excluded  from gross income  during any
     period in which we are a "substantial user" of the properties financed with
     the  proceeds  of such  mortgage  revenue  bond or a "related  person" to a
"substantial user."                                                   

     A "substantial  user"  generally  includes any underlying  borrower and any
     person  or entity  that uses the  financed  properties  on other  than a de
     minimis basis. We would be a "related  person" to a "substantial  user" for
this purpose if, among other things,                                  

     o    the same  person or entity  owned more than a 50%  interest in both us
          and in the properties financed with the proceeds of a bond owned by us
or one of our subsidiaries; or                              
     o    we owned a partnership  or similar  equity  interest in the owner of a
          property  financed  with the  proceeds of a bond owned by us or one of
our subsidiaries.                                           

     Greenberg  Traurig has  reviewed  the  mortgage  revenue  bonds we own, the
     ownership of the obligors of our mortgage  revenue  bonds and the ownership
     of our shares and our subsidiaries'  shares,  and concurs in the conclusion
     that we are not  "substantial  users" of the  properties  financed with the
     proceeds of the mortgage  revenue bonds or related parties  thereto.  There
     can be no  assurance,  however,  that  the IRS  would  not  challenge  such

24

10-K
25th Page of 151
TOC
1st
Previous
Next
Bottom
Just 25th

     conclusion. If such challenge were successful, the interest received on any
     bond for which we were treated as a "substantial user" or a "related party"
thereto would be includable in federally taxable gross income.        

SECURITIZATION PROGRAMS AND REVENUE PROCEDURE 2003-84                 

     Many of the senior  interests  in our  securitization  programs are held by
     tax-exempt money-market funds. For various reasons, money market funds will
     only acquire and hold interests in securitization programs that comply with
     Revenue Procedure  2003-84,  which provides for exemption from Schedule K-1
     reporting  requirements for certain  partnerships.  Our counsel,  Greenberg
     Traurig, has advised us that the partnerships we use in our securitizations
     currently meet the  requirements of Revenue  Procedure  2003-84.  It is our
     intention to continue to meet those  requirements,  which include an income
     test and an expense test, on an ongoing  basis.  There can be no assurance,
     however,  that  unforeseen  circumstances  might  cause  one or more of our
     securitization  partnerships  to fail either the income test or the expense
     test, which would cause our  securitization  partnerships to have to comply
     with all of the  requirements of subchapter K of the Code. In the event one
     or more of our  securitization  partnerships  was forced to comply with the
     provisions  of  subchapter  K of the  Code,  it is  likely  that all of the
     tax-exempt  money  market  funds  that hold the senior  interests  in those
     securitizations  would  tender  their  positions.  This would  require  our
     remarketing agent to locate new purchasers, which were not tax-exempt money
     market funds,  for those  tendered  senior  interests.  This would probably
     result in an  increase  in the  distributions  to the holders of the senior
     interests,  which would reduce, dollar for dollar, the distributions on the
     residual  interests in the  securitizations,  which are owned by us through
our subsidiaries.                                                     

TAXABLE INCOME                                                        

     In our Portfolio  Investing  business,  we primarily  invest in investments
     that  produce  only  tax-exempt  income.  However,  the  IRS  may  seek  to
     re-characterize  a portion of our  tax-exempt  income as taxable  income as
     described above. If the IRS were successful,  a shareholder's  distributive
     share of such income  would be taxable to the  shareholder,  regardless  of
     whether  an amount of cash  equal to such  distributive  share is  actually
     distributed.  Any taxable  income would be allocated pro rata among our CRA
     Preferred  Shares,  our CRA Shares and our common shares.  We may also have
     taxable income in the form of market  discount or gain on the sale or other
     disposition of our investments, and we expect to own investments and engage
     in certain fee generating  activities  (through our subsidiaries) that will
generate taxable income.                                              

The following discussion relates only to our REIT subsidiary:                   

     ADVERSE  CONSEQUENCES  OF  FAILURE TO  MAINTAIN  REIT  STATUS  MAY  INCLUDE
TAXATION OF A PORTION OF OUR EARNINGS NOT OTHERWISE TAXABLE           

     ARCap REIT, Inc. ("ARCap REIT"), a subsidiary of ARCap, intends to continue
     to operate in a manner so as to  qualify as a REIT for  federal  income tax
     purposes.  If ARCap REIT were to fail to  qualify as a REIT in any  taxable
     year, it would be subject to federal  income tax  (including any applicable
     alternative  minimum tax) on its taxable income at regular corporate rates,
     and distributions to its stockholders  would not be deductible in computing
     its taxable  income.  Any such corporate tax liability could be substantial
     and would  reduce  the amount of cash  available  for  distribution  to our
     shareholders.  Unless  entitled to relief under  certain  provisions of the
     Code, ARCap REIT also would be disqualified from taxation as a REIT for the
     four taxable years  following the year during which it ceased to qualify as
a REIT.                                                               

     ARCap REIT must  distribute  annually  at least 90% of its  taxable  income
     (excluding  any net  capital  gain) in order to be  exempt  from  corporate
     income  taxation of the earnings that it  distributes.  In addition,  ARCap
     REIT is subject to a 4% nondeductible  excise tax on the amount, if any, by
     which certain  distributions  it pays with respect to any calendar year are
less than the sum of:                                                 

1.   85% of its ordinary income for that year,              
2.   95% of its capital gain net income for that year; and  
          3.   100% of its  undistributed  ordinary  income and capital gain net
income from prior years.                          

     While  ARCap REIT  intends to make  distributions  to its  stockholders  to
     comply  with the 90%  distribution  requirement  and to be exempt  from the
     nondeductible  excise tax, differences in timing between the recognition of
     taxable  income  and the actual  receipt  of cash may  require it to borrow
     funds to meet this distribution requirement and to avoid the excise tax. In

25

10-K
26th Page of 151
TOC
1st
Previous
Next
Bottom
Just 26th

     addition,  the  requirement  to  distribute  a  substantial  portion of its
taxable income could cause ARCap REIT to:                             

1.   distribute amounts that represent a return of capital; 
          2.   distribute  amounts  that  would  otherwise  be spent on  capital
expenditures or repayment of debt; or             
          3.   distribute amounts that may be treated as excess inclusion income
               and accordingly,  unrelated  business taxable income in the hands
of certain not-for-profit stockholders.           

     To  qualify  as a  REIT,  ARCap  REIT  must  satisfy  certain  requirements
     concerning  the nature of its assets and  income,  which may  restrict  its
ability to invest in various types of assets. Specifically:           

          1.   at least  75% of  ARCap's  assets  must  consist  of real  estate
               assets,  cash and cash items, and certain government  securities,
               to ensure that the bulk of ARCap  REIT's  investments  are either
equity or mortgage interests in real property; and
          2.   ARCap REIT will not be able to  acquire  securities  (other  than
               securities  that are treated as an  interest in real  property or
               interests in a taxable REIT subsidiary) of any single issuer that
               would  represent  either  more than 5% of the total  value of its
               assets or 10% of the voting  securities of such issuer, to ensure
              a diversification of ARCap REIT's non-real-property investments.

     In  addition,  to satisfy  the income  requirements  of a REIT,  ARCap REIT
     generally will be restricted to acquiring  assets that generate  qualifying
     income for  purposes of certain  income  tests.  These  restrictions  could
    affect adversely ARCap REIT's ability to optimize its portfolio of assets.

   CHANGES IN TAX LAWS REGARDING REITS COULD ADVERSELY AFFECT OUR NET INCOME

     Congress,  and to some extent the United States Department of Treasury,  as
     well as state  legislatures and regulatory  authorities,  could at any time
     adversely change the way in which a REIT and its stockholders are taxed, by
     imposing additional entity-level taxes, further restricting the permissible
     beneficial  ownership  and types of assets and income of a REIT,  requiring
     additional  distributions,  or  changing  the  law  in any  other  respect.
     Moreover,  such changes could apply retroactively.  Should any such changes
be implemented, they would likely cause our net income to decline.    

6. RISKS RELATED TO INVESTING IN OUR COMPANY                                    

BECAUSE  WE  HOLD  MOST  OF  OUR  INVESTMENTS  THROUGH  OUR  SUBSIDIARIES,   OUR
SHAREHOLDERS  ARE EFFECTIVELY  SUBORDINATED TO THE LIABILITIES AND EQUITY OF OUR
SUBSIDIARIES                                                                    

We hold most of our investments  through our  subsidiaries.  Because we own only
common equity of our subsidiaries,  we, and therefore holders of our shares, are
effectively  subordinated to the debt obligations,  preferred equity, SCUs, SMUs
and  SCIs  of  our  subsidiaries,   which  at  December  31,  2006,   aggregated
approximately $3.1 billion.  In particular,  the holders of the preferred shares
of one of our Equity Issuer  subsidiaries  are entitled to receive  preferential
distributions  with respect to revenues generated by mortgage revenue bonds held
directly or  indirectly  by it, which  constitute a  substantial  portion of our
assets.   Similarly,   holders  of  senior   interests   created   through   our
securitization programs have a superior claim to the cash flow from the mortgage
revenue bonds  deposited in such  programs.  Accordingly,  a portion of the cash
flow from our investments  will not be available for  distribution on our common
shares. Likewise if we pay a common dividend:                                   

     o    holders of SCUs issued by our CharterMac  Capital  Company LLC ("CCC")
          subsidiary  are entitled to receive  preferential  distributions  with
respect to the earnings of CharterMac Capital;              
     o    holders  of  SMUs  issued  by  our CM  Investor  LLC  ("CM  Investor")
          subsidiary  are entitled to receive  preferential  distributions  with
respect to the earnings of CM Investor; and                 
     o    holders of SCIs issued by our ARCap subsidiary are entitled to receive
     preferential distributions with respect to the earnings of ARCap.

Those earnings,  therefore,  may not be available for distribution to our common
shareholders.                                                                   

26

10-K
27th Page of 151
TOC
1st
Previous
Next
Bottom
Just 27th

WE DEPEND UPON THE SERVICES OF OUR EXECUTIVE OFFICERS                           

We and our subsidiaries  depend upon the services of our executive  officers and
other individuals who comprise our executive management team. All decisions with
respect to the  management  and  control of our  Company  and our  subsidiaries,
subject  to  the  supervision  of our  board  of  trustees  (or  the  applicable
subsidiary's board), are currently made by these key officers.  The departure or
the loss of the  services  of any of these  key  officers  or a large  number of
senior  management  personnel and other employees could have a material  adverse
effect on our ability to operate our business effectively and our future results
of operations.                                                                  

OUR BOARD OF TRUSTEES CAN CHANGE OUR BUSINESS POLICIES UNILATERALLY             

Our board of trustees  may amend or revise our business  plan and certain  other
policies without  shareholder  approval.  Therefore,  our  shareholders  have no
control over changes in our  policies,  including  our  business  policies  with
respect  to  acquisitions,   financing,   growth,   debt,   capitalization   and
distributions, which are determined by our board of trustees.                   

THERE ARE POSSIBLE ADVERSE EFFECTS ARISING FROM SHARES AVAILABLE FOR FUTURE SALE

Our board of trustees is permitted to offer additional equity or debt securities
of our Company and our  subsidiaries  in exchange  for money,  property or other
consideration.  Our ability to sell or exchange such  securities  will depend on
conditions  then  prevailing in the relevant  capital markets and our results of
operations,  financial  condition,  investment portfolio and business prospects.
Subject to New York Stock Exchange rules which require shareholder  approval for
certain  issuances  of  securities  and as  long  as the  issuance  is  made  in
accordance with our trust agreement,  the issuance of such additional securities
will not be subject  to the  approval  of our  shareholders  and may  negatively
affect the resale price of our shares. Shareholders will not have any preemptive
rights in connection  with the issuance of any  additional  securities we or our
subsidiaries may offer and any of our equity offerings would cause dilution of a
shareholder's investment in us.                                                 

THE FORMER OWNERS OF CHARTERMAC  CAPITAL AND MEMBERS OF OUR MANAGEMENT TEAM HAVE
SIGNIFICANT VOTING POWER ON MATTERS SUBMITTED TO A VOTE OF OUR SHAREHOLDERS, AND
THEIR INTERESTS MAY BE IN CONFLICT WITH THE INTERESTS OF OUR OTHER SHAREHOLDERS 

In connection with our acquisition of CharterMac  Capital,  we issued to each of
its selling  principals  one special  preferred  voting  share for each SCU they
received.  Our special  preferred voting shares have no economic  interest,  but
entitle  each  holder  to one vote per  special  preferred  voting  share on all
matters  subject  to a vote of the  holders of our common  shares.  The  selling
principals of CharterMac  Capital who received  special  preferred voting shares
include members of our executive  management team (Mr. Hirmes and Mr. Schnitzer)
and a subsidiary of The Related Companies,  L.P. ("TRCLP"),  which is controlled
by Mr. Ross, the chairman of our board of trustees.                             

Mr.  Schnitzer and Mr.  Hirmes have also received  share grants from the Company
that are entitled to vote during the vesting  periods,  as have other members of
our executive management team. As a result of the special preferred voting share
issuance,  additional  common shares  directly or  indirectly  owned by them and
share grants we have made, members of our executive management team and Mr. Ross
in the  aggregate  directly  or  indirectly  owned  voting  shares  representing
approximately  20.7% of our voting power as of December 31,  2006.  As such,  if
they vote as a block, such  shareholders  will have significant  voting power on
all matters submitted to a vote of our common shareholders.                     

Also, because three of the selling principals of CharterMac Capital serve as our
managing trustees,  there are ongoing conflicts of interest when we are required
to  determine  whether or not to take  actions to enforce  our rights  under the
various  agreements  entered  into in  connection  with the  CharterMac  Capital
acquisition. While any material decisions involving these persons are subject to
the vote of a majority of our  independent  trustees,  such decisions may create
conflicts between us and these persons.                                         

In addition,  we have some obligations to these former owners which will require
us to make  choices as to how we operate  our  business  which may affect  those
obligations.  For example,  we have guaranteed the payment to all holders of the
SCUs of all but $5.0  million  of the  distributions  they  would  otherwise  be
entitled to receive under the operating  agreement of CCC. In addition,  we have
agreed to share cash flow from  investment  programs  so that we and  certain of
these former owners can receive payment of deferred fees. Further, TRCLP and its

27

10-K
28th Page of 151
TOC
1st
Previous
Next
Bottom
Just 28th

affiliates   currently   engage  in  businesses   which  compete  with  us.  The
non-competition covenants contained in a future relations agreement entered into
by TRCLP and its  affiliates in connection  with our  acquisition  of CharterMac
Capital  prohibit  TRCLP and its  affiliates  from  competing  with any business
currently engaged in by us other than in specified areas, including:            

     o    providing  credit  intermediation  on debt products secured by "80/20"
multifamily housing properties; and                         
     o    providing  mezzanine financing to multifamily housing properties other
than so-called "tax credit properties."                     

There can be no assurance that we and TRCLP and its affiliates  will not compete
for similar products and opportunities in these areas in the future.            

NO  ASSURANCE  CAN BE GIVEN THAT OUR  SHAREHOLDERS  WILL BE ENTITLED TO THE SAME
LIMITATION ON PERSONAL  LIABILITY AS  STOCKHOLDERS OF PRIVATE  CORPORATIONS  FOR
PROFIT                                                                          

We are governed by the laws of the State of Delaware.  Under our trust agreement
and  the  Delaware  Statutory  Trust  Act,  as  amended  ("Delaware  Act"),  our
shareholders  will be entitled  to the same  limitation  of  personal  liability
extended to stockholders of private  corporations for profit organized under the
General  Corporation Law of the State of Delaware.  In general,  stockholders of
Delaware  corporations  are not  personally  liable for the payment of corporate
debts and obligations,  and are liable only to the extent of their investment in
the  Delaware  corporation.  However,  a  shareholder  may be  obligated to make
certain payments provided for in our trust agreement and bylaws.  The properties
securing our  investments  are dispersed in numerous  states and the District of
Columbia.  In  jurisdictions  which  have  not  adopted  legislative  provisions
regarding statutory trusts similar to those of the Delaware Act, questions exist
as to whether such  jurisdictions  would recognize a statutory  trust,  absent a
state  statute,  and whether a court in such  jurisdiction  would  recognize the
Delaware Act as  controlling.  If not, a court in such  jurisdiction  could hold
that our  shareholders are not entitled to the limitation of liability set forth
in our trust  agreement  and the Delaware Act and, as a result,  are  personally
liable for our debts and obligations.                                           

OUR ANTI-TAKEOVER PROVISIONS MAY DISCOURAGE THIRD-PARTY PROPOSALS               

Certain  provisions of our trust agreement may have the effect of discouraging a
third party from making an  acquisition  proposal  for our  Company.  This could
inhibit a change in control of our Company under  circumstances  that could give
our  shareholders  the  opportunity  to realize a premium  over  then-prevailing
market prices. Such provisions include the following:                           

ADDITIONAL CLASSES AND SERIES OF SHARES                               

     Our trust  agreement  permits  our board of  trustees  to issue  additional
     classes or series of beneficial  interests and to establish the preferences
     and  rights  of any such  securities.  Thus,  our board of  trustees  could
     authorize the issuance of beneficial  interests  with terms and  conditions
     which  could  have  the  effect  of   discouraging   a  takeover  or  other
transaction.                                                          

STAGGERED BOARD                                                       

     Our board of trustees is divided into three  classes of managing  trustees.
     The terms of the first,  second and third classes will expire in 2008, 2009
     and 2007, respectively. Managing trustees for each class will be chosen for
     a three-year  term upon the  expiration of the current class' term. The use
     of a staggered  board makes it more  difficult for a third-party to acquire
control over us.                                                      

SALES IN THE PUBLIC  MARKET OF OUR COMMON  SHARES  ISSUABLE IN EXCHANGE  FOR OUR
SCUS, SMUS AND SCIS COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR SHARES       

Future sales of  substantial  amounts of our common  shares in the public market
could adversely affect  prevailing  market prices of our shares.  As of December
31, 2006, approximately 14.8 million common shares remained issuable in exchange
for the SCUs we issued, approximately 278,000 common shares remained issuable in
exchange for the SMUs we issued,  approximately  268,000 common shares  remained
issuable  in  exchange  for the SCIs we issued  and we have  granted  restricted
common shares of which  approximately  2.1 million were unvested at December 31,
2006.  When these shares vest and/or  convert,  their sale in the public  market
could, and depending upon the number of involved, likely would, adversely affect

28

10-K
29th Page of 151
TOC
1st
Previous
Next
Bottom
Just 29th

prevailing  market  prices of our  shares and our  ability  to raise  additional
capital  through the equity  markets.  As of December  31,  2006,  TRCLP and its
owners indirectly held approximately 10.2 million SCUs and approximately 543,000
common shares which,  subject to some  exceptions,  are not subject to a lock-up
agreement. In addition,  former executives of our Company held approximately 2.0
million  SCUs as of  December  31,  2006.  These SCUs are not subject to lock-up
agreements and may be converted to common shares at any time.                   

IF WE HAD TO REGISTER UNDER THE INVESTMENT  COMPANY ACT, THERE COULD BE NEGATIVE
CONSEQUENCES TO OUR INVESTMENT STRATEGY                                         

Neither we nor our subsidiaries are registered under the Investment  Company Act
of 1940,  as amended (the  "Investment  Company  Act") and we may not be able to
conduct our activities as we currently do if we were required to so register.   

At  all  times,  we  intend  to  conduct  our  activities,   and  those  of  our
subsidiaries, so as not to become regulated as an "investment company" under the
Investment  Company  Act.  Even if we are not an  investment  company  under the
Investment  Company Act, we could be subject to regulation  under the Investment
Company Act if a  subsidiary  of ours were deemed to be an  investment  company.
There are a number of possible exemptions from registration under the Investment
Company  Act that we  believe  apply  to us and our  subsidiaries  and  which we
believe  make it  possible  for us not to be subject to  registration  under the
Investment Company Act.                                                         

For example,  the  Investment  Company Act exempts  entities that are "primarily
engaged in the business of purchasing or otherwise acquiring mortgages and other
liens on and  interests  in real  estate,"  which  we  refer  to as  "qualifying
interests." Under current  interpretations  by the SEC staff, one of the ways in
which our  subsidiaries  can qualify for this  exemption is to maintain at least
55% of their assets  directly in  qualifying  interests  and the balance in real
estate-type interests. We believe our subsidiaries can rely on this exemption or
another exemption from registration.                                            

The requirement that our subsidiaries maintain 55% of their assets in qualifying
interests  (or satisfy  another  exemption  from  registration)  may inhibit our
ability to acquire certain kinds of assets or to securitize additional interests
in the future.  If any of our  subsidiaries  fail to qualify for exemption  from
registration as an investment  company and we, in turn, are required to register
as an investment company, our ability to maintain our financing strategies would
be  substantially  reduced,  and we would be unable to conduct  our  business as
described herein. Such a failure to qualify could have a material adverse effect
upon our ability to make distributions to our shareholders.                     

AN INABILITY TO RAISE CAPITAL OR ACCESS FINANCING ON FAVORABLE TERMS, OR AT ALL,
COULD ADVERSELY AFFECT OUR GROWTH                                               

A major  aspect of our business  plan  includes the  acquisition  of  additional
mortgage revenue bonds, which requires capital.  We typically fund the expansion
of our  business  through a  combination  of  operating  cash flows,  short-term
borrowings,  securitizations,  repurchase agreements and long-term borrowings. A
failure to renew our existing  facilities,  to increase  our capacity  under our
existing facilities or to add or new or replacement debt facilities could have a
material  adverse  effect on our  business,  financial  condition and results of
operations.  See the description of our existing  facilities under "MANAGEMENT'S
DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND RESULTS OF  OPERATIONS -
LIQUIDITY AND CAPITAL RESOURCES."                                               

We also raise capital by periodically offering securities issued by us or one or
more of our  subsidiaries.  Our  ability  to raise  capital  through  securities
offerings is subject to risks, including:                                       

o    conditions then prevailing in the relevant capital markets;      
     o    our results of operations,  financial condition,  investment portfolio
and business prospects;                                     
     o    the timing and amount of  distributions  to the  holders of our shares
  which could negatively affect the price of a common share; and
     o    the  amount  of  securities  that  are  structurally   senior  to  the
securities being sold.                                      

29

10-K
30th Page of 151
TOC
1st
Previous
Next
Bottom
Just 30th

ITEM 1B. UNRESOLVED STAFF COMMENTS.                                             

None                                                                            

ITEM 2.  PROPERTIES.                                                            

We lease the office space in which our  headquarters  are located at 625 Madison
Avenue, New York, NY. The leases expire in 2017.                                

We also lease office space in other locations as follows:                       

o    Jersey City, NJ - An office facility; the lease expires in 2010. 
o    Morristown, NJ - An office facility; the lease expires in 2007.  
o    Bethesda, MD - An office facility; the lease expires in 2009.    
o    Irvine, CA - An office facility; the lease expires in 2011.      
 o    San Francisco, CA - An office facility; the lease expires in 2012.
o    Boston, MA - An office facility; the lease expires in 2011.      
o    Irving, TX - An office facility; the leases expires in 2016.     
o    Chicago, IL - An office facility; the lease expires in 2009.     
o    San Rafael, CA - An office facility; the lease expires in 2008.  

We believe  that these  facilities  are suitable  for current  requirements  and
contemplated future operations.                                                 

ITEM 3.  LEGAL PROCEEDINGS.                                                     

We are 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 our  financial  position,  results  of
operations or cash flows.                                                       

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.                   

There were no matters  submitted to  shareholders  for voting  during the fourth
quarter of 2006.                                                                

30

10-K
31st Page of 151
TOC
1st
Previous
Next
Bottom
Just 31st

 PART II

ITEM 5. MARKET FOR REGISTRANT'S  COMMON EQUITY,  RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.                          

Market Information                                                              
------------------                                                              

Our common shares have been listed on the New York Stock  Exchange since January
10, 2006,  under the symbol "CHC".  From October 1, 1997, until January 9, 2006,
they were traded on the American Stock Exchange under the same symbol.  Prior to
October 1, 1997,  there was no established  public trading market for our common
shares.                                                                         

The high and low prices for each  quarterly  period of the last two years during
which our common shares were traded were as follows:                            

                                                                [Download Table]


                                       2006                       2005          
                             -----------------------     -----------------------
Quarter Ended                   Low           High          Low           High  
-------------                ---------     ---------     ---------     ---------
                                                                                
March 31                     $   19.52     $   22.65     $   20.65     $   24.50
June 30                      $   16.86     $   20.13     $   20.30     $   22.49
September 30                 $   18.10     $   21.05     $   20.43     $   23.37
December 31                  $   19.52     $   21.76     $   18.50     $   23.02


The last reported sale price of our common shares on the New York Stock Exchange
on February 23, 2007, was $20.70.                                               

Holders                                                                         
-------                                                                         

As of  February  23,  2007,  there were  2,798  registered  shareholders  owning
51,404,234 common shares.                                                       

Distributions                                                                   
-------------                                                                   

After providing for distributions to our 4.4% Convertible  Preferred Shares, our
net income is allocated pro rata among the common shares and the Convertible CRA
Shares (see Note 14 to the consolidated financial  statements).  The Convertible
CRA  Shares  rank on par with the common  shares  with  respect  to rights  upon
liquidation,  dissolution  or  winding  up of our  Company,  although  both  are
subordinate  to our  4.4%  Convertible  CRA  Preferred  shares.  Quarterly  cash
distributions during the years ended December 31, 2006 and 2005 were as follows:

                                                                [Download Table]


                                                                   Total Amount 
                                          Date         Per         Distributed  
Cash Distribution for Quarter Ended       Paid        Share       (In thousands)
-----------------------------------     --------     --------     --------------
                                                                                
March 31, 2006                           5/15/06     $   0.42        $24,764    
June 30, 2006                            8/14/06         0.42         24,806    
September 30, 2006                      11/14/06         0.42         25,175    
December 31, 2006                        2/14/07         0.42         25,201    
                                                     --------        -------    
Total for 2006                                       $   1.68        $99,946    
                                                     ========        =======    

March 31, 2005                           5/13/05     $   0.41        $23,729    
June 30, 2005                            8/12/05         0.41         23,766    
September 30, 2005                      11/14/05         0.41         23,843    
December 31, 2005                        2/14/06         0.42         24,587    
                                                     --------        -------    
Total for 2005                                       $   1.65        $95,925    
                                                     ========        =======    


31

10-K
32nd Page of 151
TOC
1st
Previous
Next
Bottom
Just 32nd

There are no material legal  restrictions  upon our present or future ability to
make  distributions  in accordance with the provisions of our Second Amended and
Restated  Trust  Agreement.  We do not  believe  that  the  financial  covenants
contained in our and our subsidiaries'  secured  indebtedness or in the terms of
the preferred shares issued by Equity Issuer will have any adverse impact on our
ability to make distributions in the normal course of business to our common and
Convertible CRA shareholders.  Future distributions will be at the discretion of
the  trustees  based upon  evaluation  of our actual cash flows,  our  financial
condition,  capital  requirements  and such other  factors as our trustees  deem
relevant.                                                                       

Securities authorized for issuance under equity compensation plans              
------------------------------------------------------------------              

The following table provides information related to our share incentive plans as
of December 31, 2006:                                                           

                                                        [Enlarge/Download Table]


                                          (a)                  (b)                      (c)         

                                                                               Number of securities 
                                       Number of                             remaining available for
                                   securities to be                           future issuance under 
                                 issued upon exercise   Weighted-average       equity compensation  
                                    of outstanding      exercise price of        plans (excluding   
                                   options, warrants   outstanding options,  securities reflected in
                                      and rights       warrants and rights         column a) (1)    
                                 --------------------  --------------------  -----------------------
                                                                                                    
Equity compensation plans                                                                           
   approved by security holders        2,018,741            $   20.77               3,794,017       
Equity compensation plans not                                                                       
   approved by security holders               --                   --                      --       
                                       ---------            ---------               ---------       

Totals                                 2,018,741            $   20.77               3,794,017       
                                       =========            =========               =========       


(1)  Our  Incentive  Share  Plan  (see  Note  15 to the  consolidated  financial
     statements)   authorizes   us  to  issue   options  or  other   share-based
     compensation  equal to 10% of the total shares  outstanding  (as defined in
     the plan) as of  December  31 of the year  preceding  the  issuance  of new
grants or options.                                                    

Securities purchased by us                                                      
--------------------------                                                      

The following  table  presents  information  related to our  repurchases  of our
equity  securities  during  the  fourth  quarter  of 2006 and other  information
related to our repurchase program:                                              

                                                        [Enlarge/Download Table]


                                                         Purchases of Equity Securities                          

                                        (a)               (b)                  (c)                  (d)          

                                                                          Total number                           
                                       Total                                of shares         Maximum number     
                                     number of          Average         purchased as part  of shares that may yet
                                       shares         price paid           of publicly     be purchased under the
             Period                purchased (1)       per share        announced program     plans or program   
---------------------------------  ---------------  ----------------    -----------------  ----------------------
                                                                                                                 
October 1 - 31, 2006                       --         $     --                   --                              
November 1 - 30, 2006                  77,080            21.35                   --                              
December 1 - 31, 2006                  18,507            21.35                   --                              
                                     --------         --------             --------                              

Total                                  95,587         $  21.35                   --                570,540       
                                     ========         ========             ========             ==========       


(1)  These  repurchases  were in  connection  with tax  withholding  obligations
     incurred by holders of newly vested  restricted  shares and were outside of
our share repurchase program.                                         

32

10-K
33rd Page of 151
TOC
1st
Previous
Next
Bottom
Just 33rd

Other  information  required by this item, as well as information  regarding our
share  repurchase  program  and  share  compensation  paid  to  our  independent
trustees,  is  included  in  Notes  14  and  15 to  our  consolidated  financial
statements.                                                                     

ITEM 6.  SELECTED FINANCIAL DATA.                                               

The information set forth below presents our selected financial data. Additional
financial information is set forth in the consolidated  financial statements and
notes thereto.                                                                  

For the Years Ended December 31 (in thousands, except per share amounts):       

                                                        [Enlarge/Download Table]


Operations                           2006 (1)      2005 (2)      2004 (3)      2003 (4)       2002     
---------------------------------  -----------   -----------   -----------   -----------   ----------- 
                                                                                                       
Total revenues                     $   387,259   $   295,097   $   232,432   $   152,240   $   116,614 

Income before income taxes         $    47,786   $    30,437   $    48,120   $    60,514   $    62,117 

Net income                         $    41,294   $    59,014   $    65,363   $    66,586   $    60,833 
Net income applicable to                                                                               
  shareholders (5)                 $    36,542   $    56,994   $    65,363   $    61,248   $    55,905 

Net cash provided by (used in):                                                                        

  Operating activities             $    86,716   $       685   $   106,405   $    97,902   $    80,977 
  Investing activities             $  (523,896)  $  (373,018)  $  (366,647)  $  (365,419)  $  (418,379)
  Financing activities             $   454,792   $   462,341   $   279,295   $   306,052   $   245,737 

Net income per share (5)                                                                               

  Basic                            $      0.63   $      0.98   $      1.19   $      1.31   $      1.31 

  Diluted                          $      0.62   $      0.98   $      1.19   $      1.31   $      1.31 

Financial position                                                                                     
---------------------------------                                                                      

Total assets                       $ 9,688,516   $ 6,968,757   $ 5,737,221   $ 2,581,169   $ 1,852,868 
Financing arrangements             $ 1,801,170   $ 1,429,692   $ 1,068,428   $   900,008   $   671,659 

Notes payable                      $   591,165   $   304,888   $   174,454   $   153,350   $    68,556 
Preferred shares of subsidiary:                                                                        
  Subject to mandatory repurchase  $   273,500   $   273,500   $   273,500   $   273,500   $   273,500 
  Not subject to mandatory                                                                             
  repurchase                       $   104,000   $   104,000   $   104,000   $      --     $      --   

Dividends                                                                                              
---------------------------------                                                                      

Dividends declared per share (6)   $      1.68   $      1.65   $      1.57   $      1.37   $      1.26 


(1)  Includes  ARCap  beginning in August 2006,  and includes  $29.2  million of
     expense  (or $0.50 per basic and  diluted  share)  related  to a  valuation
     allowance  recorded  against  deferred  tax  assets  (see  Note  12 to  the
consolidated financial statements).                                   
(2)  Includes a $22.6 million  non-cash pre-tax charge ($12.3 million after tax,
     or $0.21 per basic and  diluted  share)  related  to the  write-off  of the
     "Related  Capital Company"  trade-name  intangible asset (see Note 5 to the
consolidated financial statements).                                   
(3)  Reflects  adoption  of  Interpretation  46(R),  CONSOLIDATION  OF  VARIABLE
     INTEREST  ENTITIES ("FIN  46(R)"),  as of March 31, 2004 (See Note 1 to the
consolidated financial statements).                                   
(4)  Includes CharterMac Capital beginning in November 2003.                    
(5)  Includes common shareholders and Convertible CRA shareholders.             
(6)  Distributions per share are the same for both common shares and Convertible
CRA shares.                                                           

ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.                                                                  

The following Management's  Discussion and Analysis ("MD&A") is intended to help
the reader  understand  the results of  operations  and  financial  condition of
CharterMac.  MD&A  is  provided  as a  supplement  to,  and  should  be  read in
conjunction  with, our  consolidated  financial  statements and the accompanying
notes.                                                                          

Forward-Looking Statements                                                      
--------------------------                                                      

This MD&A contains forward-looking statements.  These forward-looking statements
are not historical  facts, but rather our beliefs and expectations and are based
on our current  expectations,  estimates,  projections,  beliefs and assumptions
about  our  Company  and  industry.  Words  such  as  "anticipates,"  "expects,"
"intends," "plans," "believes," "seeks," "estimates" and similar expressions are
intended  to  identify  forward-looking  statements.  These  statements  are not

33

10-K
34th Page of 151
TOC
1st
Previous
Next
Bottom
Just 34th

guarantees of future  performance  and are subject to risks,  uncertainties  and
other  factors,  some of which are beyond our control,  are difficult to predict
and could cause  actual  results to differ  materially  from those  expressed or
forecasted in the  forward-looking  statements.  Some of these risks  (described
more fully in Item 1A. of this filing on Form 10-K) include, among other things:

o    adverse changes in real estate markets;                          
o    competition with other companies;                                
o    interest rate fluctuations;                                      
o    general economic and business conditions;                        
o    environmental/safety requirements;                               
o    changes in applicable laws and regulations;                      
     o    our tax treatment,  the tax treatment of our  subsidiaries and the tax
treatment of our investments;                               
     o    risk of default  associated with the mortgage  revenue bonds and other
securities held by us or our subsidiaries;                  
o    risks associated with providing credit intermediation;           
o    risk of loss under mortgage banking loss sharing agreements;     
o    risk of loss from direct and indirect  investments in CMBS;      
     o    the risk that  relationships with key investors and developers may not
continue;                                                   
o    our ability to generate fee income may not continue; and         
     o    risks related to the form and structure of our financing arrangements.

We caution you not to place undue reliance on these forward-looking  statements,
which reflect our view only as of the date of this annual report on Form 10-K.  

Factors Affecting Comparability                                                 
-------------------------------                                                 

ACQUISITIONS                                                                    

In August 2006, we acquired ARCap.  Prior to the  acquisition  date, we recorded
equity  earnings  on our  10.7%  equity  investment  in ARCap  in our  Portfolio
Investing  segment.  Following the acquisition,  operating  results of ARCap are
included in our Fund Management,  Mortgage Banking and Consolidated Partnerships
segments. In addition,  we incurred  restructuring costs associated with planned
integration  activities  and  incurred  increased  non-cash  compensation  costs
following the acquisition due to non-vested share grants.                       

We acquired Capri Capital Limited Partnership  ("CCLP") in March 2005. Operating
results in our Portfolio Investing segment prior to the acquisition date include
interest income on a loan made to CCLP in July 2004.  Following the acquisition,
operating results of CCLP are included in our Mortgage Banking segment.         

ACCOUNTING CHANGES                                                              

The adoption of several accounting  pronouncements has affected our consolidated
financial statements.                                                           

Primarily due to our adoption of FIN 46(R) as of March 31, 2004, we  consolidate
more than 149  partnerships  (predominantly  investment funds we sponsor) in our
consolidated  financial  statements.  The  operating  results  for 2006 and 2005
include  a full  period  of  operations  for  these  entities,  as  well  as the
elimination of transactions between the entities and our subsidiaries.  In 2004,
the operating  results include only nine months' operating results as we adopted
this  accounting  standard as of March 31 of that year (see Notes 1 and 7 to the
consolidated financial statements).                                             

The adoption of FIN 46(R) led to a significant  increase in the amount of assets
and  liabilities we record and also results in the  recognition of the operating
results of  partnerships  in which we have  virtually  no equity  interest,  the
elimination of transactions  between our businesses and those  partnerships  and
the allocation of their results to their investor partners.                     

OTHER ITEMS                                                                     

During  June 2006,  we created  our  Centerbrook  subsidiary  to provide  credit
intermediation products to the affordable housing finance industry. Our majority
ownership of Centerbrook  will enable us to  prospectively  retain a significant

34

10-K
35th Page of 151
TOC
1st
Previous
Next
Bottom
Just 35th

portion of the fees that we would have paid to third party credit providers.  We
have incurred various start-up costs in connection with this subsidiary in 2006.

In September  2006, we terminated a loan  investment  and  recognized a one-time
gain  totaling  approximately  $6.9  million.  We also closed a  subsidiary  and
recorded goodwill and intangible asset impairment  charges of approximately $2.6
million in the third and fourth quarters of 2006.                               

The income tax  provision or benefit is affected by the book income or losses of
the taxable  businesses and tax  deductible  distributions  on their  subsidiary
equity.  In 2006,  a current  tax  provision  (due to higher  currently  taxable
income) is coupled  with a  valuation  allowance  against  deferred  tax assets.
Management  determined  that,  in  light  of  projected  taxable  losses  in the
corporate  subsidiaries  for the  foreseeable  future,  all of the  deferred tax
assets will likely not be realized and hence a valuation allowance was provided.
In 2005 and 2004, an income tax benefit was recognized.                         

At the end of 2005,  management  elected to discontinue  the use of the "Related
Capital Company" trade name, effective January 1, 2006. The decision resulted in
the non-cash  write-off of an intangible  asset recorded at the time we acquired
Related  Capital (now known as CharterMac  Capital).  The write-off  amounted to
$22.6 million and reduced net income by $12.3  million,  net of tax benefit,  or
$0.21 per basic and diluted share.                                              

Results of Operations                                                           
----------------------                                                          

OVERVIEW                                                                        

The following is a summary of our operations:                                   

                                                        [Enlarge/Download Table]


                                                                                         %           %   
                                                                                       Change     Change 
                                  % of                  % of                  % of    2006 vs.   2005 vs.
  (In thousands)       2006     Revenues     2005     Revenues     2004     Revenues    2005       2004  
------------------  ---------   --------  ---------   --------  ---------   --------  --------   --------
                                                                                                         
Total revenues      $ 387,259    100.0%   $ 295,097    100.0%   $ 232,432    100.0%     31.2 %    27.0 % 

Income before                                                                                            
  income taxes:                                                                                          
Income (loss)                                                                                            
  subject to tax      (31,555)    (8.1)     (48,872)   (16.6)     (31,965)   (13.8)    (35.4)     52.9   
Income not subject                                                                                       
  to tax               79,341     20.5       79,309     26.9       80,085     34.5        --      (1.0)  
                    ---------   ------    ---------   ------    ---------   ------    ------    ------   
                       47,786     12.3       30,437     10.3       48,120     20.7      57.0     (36.7)  
Income tax                                                                                               
(provision)                                                                                              
benefit                (6,492)    (1.7)      28,577      9.7       17,243      7.4    (122.7)     65.7   

Net income             41,294     10.7       59,014     20.0       65,363     28.1     (30.0)     (9.7)  


Our  consolidated  results  over the  three-year  period  reflect  our  changing
business focus from direct investing,  primarily generating recurring,  revenues
towards  growing the  business  through fund and asset  management  with a large
proportion of fee-based transaction income. This transition included:           

     o    rapid  growth  of  our  taxable,   fee-based   business   through  the
          sponsorship  of  increasingly  larger and  greater  number of funds in
2004, 2005 and 2006;                                        
     o    approximately  doubling  our  Mortgage  Banking  business  through the
acquisition of CCLP in 2005;                                
o    commencement of Centerbrook in June 2006; and                    
     o    our acquisition of ARCap in August 2006 positively  impacting our Fund
Management and Mortgage Banking segments.                   

Our  reported  revenues  do not  fully  reflect  the  growth  of the  individual
businesses due to the impact of consolidating sponsored investment partnerships,
as described  more fully below.  The  underlying  revenue  growth stems from the

35

10-K
36th Page of 151
TOC
1st
Previous
Next
Bottom
Just 36th

introduction  of  new  products  such  as   variable-rate   bond  financing  and
loss-sharing mortgage loan originations for Freddie Mac.                        

Beyond the growth of our  businesses,  costs have also  increased  due to (among
other factors):                                                                 

     o    increasing financing costs due to higher borrowing levels attendant to
expansion and general increases in interest rates;          
     o    the requirement  for  infrastructure  to support growth,  primarily in
2004 and 2005, and the costs to operate acquired businesses;
     o    the costs associated with the creation of tax credit equity funds that
          vary  with  the  level  of fund  sponsorship  activity,  although  the
          majority  of such  costs are  reimbursed  and the  reimbursements  are
recognized as revenue;                                      
     o    start-up costs as well as termination and other costs  associated with
          the  restructuring of  securitization  programs in connection with the
launch of Centerbrook; and                                  
     o    restructuring  costs relating to  integration  actions with respect to
the ARCap acquisition in 2006.                              

Along  with  the  compositional  changes  in  the  business,  we  are  now  also
increasingly  subject to  taxation,  although tax benefits may result based upon
the  annual  taxable  income or loss from  these  businesses.  The tax  benefits
recognized in 2004 and 2005 reflect the  increasing  proportion of these taxable
businesses and increased book losses of those  businesses.  The tax provision in
the 2006 period  relates to a higher  level of current  taxable  income from the
Fund Management segment due to increased fund sponsorship activity, coupled with
a valuation  allowance  against  deferred  tax assets as noted  above.  See also
INCOME TAXES below.                                                             

REVENUES                                                                        

Our revenues for the years ended December 31 were as follows:                   

                                                        [Enlarge/Download Table]


                                                           % Change             % Change 
                                                           2006 vs.             2005 vs. 
           (In thousands)                2006      2005      2005       2004      2004   
-------------------------------------  --------  --------  --------   --------  -------- 
                                                                                         
Mortgage revenue bond interest income  $156,500  $146,024      7.2 %  $132,075     10.6 %

Other interest income                    34,159    16,162    111.4       9,346     72.9  

Fee income                                                                               
Fund sponsorship                         44,739    50,982    (12.2)     45,564     11.9  
Mortgage banking                         34,247    27,104     26.4      15,026     80.4  
Credit intermediation                     5,215     6,694    (22.1)      8,476    (21.0) 
                                       --------  --------  -------    --------  -------  
Total fee income                         84,201    84,780     (0.7)     69,066     22.8  

Other revenues                                                                           
Prepayment penalties                      6,856     6,326      8.4       1,877    237.0  
Construction service fees                 4,801     4,583      4.8       1,445    217.1  
Rental income of real estate owned        5,918     3,860     53.3          --       --  
Administration fees                       2,371     1,832     29.4       1,381     32.7  
Expense reimbursements                    3,658     4,923    (25.7)      2,785     76.8  
Other                                     5,057     2,511    101.4       2,244     11.9  
                                       --------  --------  -------    --------  -------  
Total other revenues                     28,661    24,035     19.2       9,732    147.0  

Revenues of consolidated partnerships    83,738    24,096    247.5      12,213     97.3  
                                       --------  --------  -------    --------  -------  

Total revenues                         $387,259  $295,097     31.2 %  $232,432     27.0 %
                                       ========  ========  =======    ========  =======  


The  ARCap  acquisition  in  2006  and the  CCLP  acquisition  in  2005  drove a
significant   amount  of  our  annual   revenue   increase  in  2006  and  2005,
respectively.  Adjusting to include  ARCap  revenues  and CCLP  revenues for all
periods, our total revenues would have increased approximately 11.9% in 2006 and
8.6% in 2005.                                                                   

As we  transition  to increase  our position as an asset and fund  manager,  the
revenue  fluctuations above are not necessarily  representative of the growth of
our businesses as we consolidate many  partnerships from which we earn revenues,
and as a result many transactions are eliminated in consolidation.  For example,
we eliminate  revenues earned by our subsidiaries in transactions with LIHTC and
Property  Partnerships  we have  consolidated  but in which we have virtually no

36

10-K
37th Page of 151
TOC
1st
Previous
Next
Bottom
Just 37th

equity interest.  Although the amounts are eliminated in consolidation,  the net
losses  recognized by those  partnerships in connection with these  transactions
are absorbed by their equity partners; as such, the elimination in consolidation
has an insignificant impact on our net income. The consolidation also results in
the  elimination  of  revenues  earned  by  our  Portfolio  Investing  and  Fund
Management  subsidiaries for transactions  with the  partnerships.  The revenues
eliminated were as follows:                                                     

                                                        [Enlarge/Download Table]


                                                           % Change            % Change
                                                           2006 vs.            2005 vs.
          (In thounsands)                2006      2005      2005      2004      2004  
-------------------------------------  --------  --------  --------  --------  --------
                                                                                       
Mortgage revenue bond interest income  $11,198   $ 3,555    215.0 %   $   581   511.9 %
Other interest income                      210       321    (34.6)        159   101.9  
Fund sponsorship fees                   47,152    39,708     18.7      25,531    55.5  
Credit intermediation fees               3,789     3,152     20.2       1,609    95.9  
Other revenues                           5,372     2,783     93.0       3,320   (16.2) 
                                       -------   -------   ------     -------  ------  
Total                                  $67,721   $49,519     36.8 %   $31,200    58.7 %
                                       =======   =======   ======     =======  =====   


These  amounts,  along with  revenues of  consolidated  partnerships,  increased
significantly  over  the  three  year  period  due  to  additional  partnerships
consolidated during the periods.                                                

For discussion of individual revenue streams, see RESULTS BY SEGMENT below.     

EXPENSES                                                                        

Our expenses for the three years ended December 31 were as follows:             

                                                        [Enlarge/Download Table]


                                                           % Change            % Change  
                                                           2006 vs.            2005 vs.  
          (In thounsands)                2006      2005      2005      2004      2004    
-------------------------------------  --------  --------  --------  --------  --------  
                                                                                         
Interest expense                       $ 97,055  $ 56,698    71.2 %  $ 30,932     83.3  %
                                       --------  --------  ------    --------   ------   
Interest expense - preferred shares                                                      
  of subsidiary                          18,898    18,898      --      18,898      --    
                                       --------  --------  ------    --------   ------   

Salaries and benefits                    94,916    68,983    37.6      56,044     23.1   
Fund origination and property                                                            
  acquisition expenses                   12,338    15,704   (21.4)     15,980     (1.7)  
Operating costs of real estate owned      4,861     3,218    51.1          --       --   
Restructuring costs                       1,446        --      --          --       --   
Other general and administrative         52,087    40,708    28.0      29,282     39.0   
                                       --------  --------  ------    --------   ------   
  Subtotal                              165,648   128,613    28.8     101,306     27.0   
                                       --------  --------  ------    --------   ------   

Depreciation and amortization            47,527    44,195     7.5      30,407     45.3   
Write off of intangible assets            2,644    22,567   (88.3)         --       --   
Loss on impairment of assets              5,003     4,555     9.8         757    501.7   
                                       --------  --------  ------    --------   ------   
  Subtotal                              336,775   275,526    22.2     182,300     51.1   
                                       --------  --------  ------    --------   ------   

Interest expense of consolidated                                                         
  LIHTC and Property partnerships        25,989    26,322    (1.3)     21,395     23.0   
Interest expense of consolidated CMBS                                                    
  and Direct Loan partnerships           21,937        --      --          --       --   
                                       --------  --------  ------    --------   ------   
                                         47,926    26,322    82.1      21,395     23.0   
                                       --------  --------  ------    --------   ------   
Other expenses of consolidated LIHTC                                                     
  and Property partnerships              75,479    49,810    51.5      30,519     63.2   
Other expenses of consolidated CMBS                                                      
  and Direct Loan partnerships              467        --      --          --       --   
                                       --------  --------  ------    --------   ------   
                                         75,946    49,810    52.5      30,519     63.2   
                                       --------  --------  ------    --------   ------   
  Subtotal                              123,872    76,132    62.7      51,914     46.7   
                                       --------  --------  ------    --------   ------   

Total expenses                         $460,647  $351,658    31.0 %  $234,214     50.1 % 
                                       ========  ========  ======    ========   ======   


The total amount of operating costs we recognize  increased  significantly  over
the three-year period due to increased investment activity and general expansion
of our businesses,  the CCLP acquisition in 2005, the ARCap  acquisition in 2006
and the amortization of intangible assets acquired.                             

37

10-K
38th Page of 151
TOC
1st
Previous
Next
Bottom
Just 38th

The  increase in interest  expense  reflects the higher  borrowing  levels as we
expand our various business lines.  Significant  borrowings during 2006 and 2005
included those related to:                                                      

     o    our  acquisition  of ARCap in 2006,  for which the cash portion of the
purchase price was approximately $263.3 million;            
     o    acquisitions   and  fundings  of  mortgage   revenue  bonds   totaling
        approximately $419.9 million in 2006 and $443.5 million in 2005; and
     o    short-term  lending for mortgage loans prior to their sale to agencies
          and  conduits,  which  increased  markedly  in  2006  and  2005 as the
business grew.                                              

In addition to higher  borrowings,  interest  expense over the three year period
reflects an increase in the average  borrowing  rate,  resulting  primarily from
gradual  increases in the Bond Market  Association  Municipal Swap Index ("BMA")
and LIBOR rates over the three year period,  following  sharp  declines in prior
years. Interest expense also includes amounts paid and received pursuant to swap
agreements as part of our risk management strategy.                             

                                                                [Download Table]


       (Dollars in thousands)            2006          2005          2004     
------------------------------------  ----------    ----------    ----------  
                                                                              
Average borrowing rate                       4.6 %         3.8 %         2.6 %
Average BMA rate                            3.45 %        2.45 %        1.22 %
Average LIBOR rate                          5.13 %        3.46 %        1.54 %
Swap agreements - notional amount at                                          
   December 31                        $  725,000    $  500,000    $   50,000  


The amount  reported  as  "interest  expense - preferred  shares of  subsidiary"
represents  dividends on the Equity Issuer  preferred shares that are subject to
mandatory  repurchase (see also OTHER ITEMS below regarding  dividends on shares
that are not subject to mandatory repurchase).                                  

The  increase  in  salaries  and  benefits  expense in 2006 as  compared to 2005
primarily relates to:                                                           

o    approximately 100 employees added upon the ARCap acquisition;    
     o    incremental  non-cash  compensation cost of approximately $8.0 million
          related to shares issued in connection with the ARCap  acquisition (of
          the incremental  amount,  approximately $1.1 million related to shares
that vested immediately);                                   
     o    deferred  participation  compensation  of  approximately  $4.7 million
related to CMBS funds we sponsor;                           
     o    severance related costs of approximately  $2.5 million associated with
   the elimination of certain executive positions during 2006; and
o    continued growth of our component businesses.                    

The  increase in salaries  and  benefits  expense in 2005 as compared to 2004 is
primarily  related  to the  acquisition  of  CCLP in 2005  and the  addition  of
approximately  100  employees  at that time.  In  addition,  2005 also  includes
approximately  $3.2  million  of costs  related  to the  departure  of our Chief
Executive Officer and an executive of one of our subsidiaries.                  

Fund origination and property  acquisition  expenses represent costs incurred in
connection with  originating  tax-credit  equity  investment funds and acquiring
properties for those  investment  funds (see FUND  MANAGEMENT  section below for
related revenue discussion).                                                    

Restructuring  costs relate to integration  initiatives  in connection  with the
ARCap acquisition.                                                              

Other general and administrative  expenses in many categories  increased in 2006
and 2005 due to the expansion of our businesses, increased occupancy needs and: 

     o    the  acquisitions  of ARCap in 2006 and CCLP in 2005  which  increased
infrastructure costs;                                       
     o    start-up  costs  and   termination  and  other  fees  associated  with
          restructuring  of our  securitization  programs in connection with the
launch of Centerbrook in 2006; and                          
     o    growth in  professional  fees due, in part, to auditing and compliance
          costs related to Sarbanes-Oxley implementation and legal costs related
          to protecting our interests in properties whose developers/contractors
          experienced  financial  problems  (see  Note  21 to  the  consolidated

38

10-K
39th Page of 151
TOC
1st
Previous
Next
Bottom
Just 39th

          financial statements) and other properties on which we foreclosed (see
Note 6 to the consolidated financial statements).           

Depreciation and amortization expenses were higher in the 2006 and 2005 periods,
primarily due to:                                                               

     o    higher  amortization of mortgage  servicing  rights following the CCLP
          and ARCap  acquisitions  and the  expansion  of the  Mortgage  Banking
business;                                                   
     o    a write-off of previously deferred fees in 2006 in connection with the
          restructuring  of certain  securitization  programs upon the launch of
Centerbrook; and                                            
     o    recognizing a retroactive  depreciation charge in 2006 for real estate
          owned which was reclassified  from held for sale to held and used (see
Note 6 to the consolidated financial statements).           

The  write-off of  intangible  assets in 2006  represents a goodwill  impairment
charge of  approximately  $1.0  million to account  for the portion of our total
investment in a subsidiary  that we did not recover upon  discontinuance  of the
business  and the  write-off  of $1.6 million in  unamortized  other  intangible
assets recognized at the time of its acquisition. The 2005 write-off pertains to
management's  decision at the end of 2005 to discontinue the use of the "Related
Capital Company" trade name when we renamed the subsidiary  CharterMac  Capital.
The absence of  amortization  during 2006  related to this  write-off  partially
offset the depreciation and amortization increases above.                       

Operating  costs of real estate owned relates to properties  foreclosed  upon in
May 2005 in connection with three of our mortgage revenue bonds. The 2006 period
represents a full year worth of operating costs compared to approximately  eight
months during 2005.                                                             

Loss on impairment of assets is discussed in PORTFOLIO INVESTING below.         

The increases in the LIHTC and Property partnerships expense categories over the
three year  period are due to the  increase  in the number of such  partnerships
consolidated  due to the  incremental  fund  sponsorship  activity as well as an
increase in the number of Property  Partnerships  which we have taken control of
over the past two  years to  protect  our  investments  (see also Note 21 to the
consolidated  financial  statements).  Virtually  all  of  the  expenses  of the
consolidated  partnerships are absorbed by their equity partners;  as such, they
have an insignificant impact on our net income.                                 

Expenses of consolidated  CMBS and Direct Loan  partnerships  represent funds we
sponsor to syndicate investments in CMBS and associated resecuritization trusts,
along with a Direct Loan partnership we manage and consolidate. These items were
incorporated  into our financial  results  following our acquisition of ARCap in
August 2006.                                                                    

OTHER ITEMS                                                                     

                                                        [Enlarge/Download Table]


                                                               % Change                % Change 
                                                                2006 vs.               2005 vs. 
            (In thousands)                2006        2005        2005        2004       2004   
-------------------------------------  ---------   ---------   ----------  ---------   ---------
                                                                                                
Equity and other income                $   1,978   $   7,037     (71.9)%   $   3,442    104.4 % 

Gain on termination of CCA loan        $   6,916   $      --        -- %   $      --       -- % 
Gain on sale or repayment of mortgage                                                           
  revenue bonds and other assets           1,120       1,561     (28.3)          217    619.4   
Gain on sale or repayment of loans        10,334       6,501      59.0         7,651    (15.0)  
                                       ---------   ---------    ------     ---------   ------   
Gain on sale or repayment of loans     $  18,370   $   8,062     127.9 %   $   7,868      2.5 % 
  and mortgage revenue bonds                                                                    

Income allocated to preferred                                                                   
  shareholders of subsidiary           $  (6,225)  $  (6,225)       -- %   $  (3,942)    57.9 % 

Income allocated to SCUs               $ (16,131)  $ (23,091)    (30.1)%   $ (28,174)   (18.0)% 
Income allocated to SMUs                    (102)       (330)    (69.1)           --       --   
Income allocated to SCI's                    (80)         --        --            --       --   
Other                                        219          --        --          (194)      --   
                                       ---------   ---------    ------     ---------   ------   
Total income allocated to minority     $ (16,094)  $ (23,421)    (31.3)%   $ (28,368)   (17.4)% 
  interests                                                                                     

Loss allocated to partners of                                                                   
  consolidated partnerships            $ 401,377   $ 349,531      14.8 %   $ 219,950     58.9 % 


39

10-K
40th Page of 151
TOC
1st
Previous
Next
Bottom
Just 40th

Equity and other income  decreased in the 2006 period as we no longer  recognize
equity income from our investment in ARCap after  completing our  acquisition in
August.  Subsequent  to the  ARCap  acquisition,  equity  and  other  income  is
comprised of income earned from property  development joint ventures,  offset by
losses from tax advantaged  investment vehicles similar to those we sponsor. The
sharp increase in 2005 relates to the level of joint venture investment activity
as several ventures approached  completion,  allowing us to realize our share of
development   income  and  gains  on  sale.  The  2005  increase  also  includes
incremental  dividends from  converting a portion of our ARCap  investment  from
preferred to common units.  Equity  income from our  investment in CMBS funds is
eliminated in  consolidation,  but positively  impacts our net income.  From the
date of acquisition  through  December 31, 2006,  this amount was  approximately
$15.3  million.  There is no comparable  amount in 2005 or 2004 as this earnings
stream began with our acquisition of ARCap.                                     

Gain on termination  of CCA loan  represents the $6.0 million cash paid to us by
CCA to terminate our rights relating to a  participating  loan and the estimated
value of the manager  interest in CUC that was assigned to us (see Note 4 to the
consolidated financial statements).                                             

The variance in gain on repayment of mortgage revenue bonds relates to the level
of repayments in the Portfolio  Investing segment.  Similarly,  the year-to-year
variations  in gains on sales or  repayment  of loans  are  attributable  to the
fluctuations  in the volume of  mortgage  originations.  See  RESULTS BY SEGMENT
below.                                                                          

The  total of  "income  allocated  to  preferred  shareholders  of  subsidiary,"
increased in 2005 as compared to the 2004 period due to an additional  preferred
offering consummated in April 2004.                                             

The income  allocation to SCUs and SMUs and SCIs of subsidiaries  represents the
proportionate  share of after-tax  income  attributable to holders of subsidiary
equity as if they were all converted to common  shares and therefore  fluctuates
along  with net  income.  There was no income  allocated  to SMUs in 2004 as the
units were first  issued in May 2005;  likewise,  the SCIs were issued in August
2006 in connection with our ARCap acquisition. "Other" minority interest in 2006
principally  represents the portion of Centerbrook owned by IXIS. The amount for
2004  pertains  to the  portion of CMC that we did not  acquire  until the first
quarter of 2005.                                                                

The loss  allocation to partners of  consolidated  partnerships  represents  the
operating losses of LIHTC and Property  partnerships,  of which we have absorbed
an insignificant portion  (approximately  $10,000) and the majority ownership in
CMBS funds we sponsor.                                                          

Income Taxes                                                                    
------------                                                                    

A large majority of our pre-tax  income is derived from our Portfolio  Investing
businesses,  which are structured as flow-through  entities.  Likewise, the CMBS
and Direct  Loan Fund  Sponsorship  businesses  which are  included  in our Fund
Management  segment are  similarly  structured.  As such,  the income from those
businesses does not subject us to income taxes.                                 

The Fund Management  businesses  (other than those noted above) and the Mortgage
Banking  businesses,  however,  are conducted in corporations and are subject to
income taxes.  Because the distributions paid on the minority interests in these
corporate  subsidiaries  effectively  provide a tax deduction,  as well as other
factors within these  businesses,  they often have losses for book purposes.  In
2005,  the other factors  include the $22.6  million  write-off of an intangible
asset (see EXPENSES above and Note 5 to the consolidated financial statements). 

We provide for income taxes for these corporate  subsidiaries in accordance with
SFAS No. 109,  ACCOUNTING  FOR INCOME TAXES ("SFAS No. 109") which  requires the
recognition of deferred tax assets and  liabilities  for the expected future tax
consequences of temporary  differences  between the financial statement carrying
amounts and the tax bases of assets and liabilities.                            

The tax benefit  disclosed  in years prior to 2006 relates to the book losses of
the taxable businesses and the tax deductible  distributions on their subsidiary
equity.  As the proportion of our pre-tax  income  contributed by the businesses
generating  taxable  income and losses  changes,  the  resulting  tax benefit or
provision  may appear  incongruous  with our  consolidated  income before income
taxes, as illustrated in Note 12 to the consolidated  financial  statements.  In
2006,  a current  tax  provision  (due to higher  currently  taxable  income) is
coupled  with a valuation  allowance  against  deferred  tax assets.  Management
determined  that,  in  light  of  projected  taxable  losses  in  the  corporate

40

10-K
41st Page of 151
TOC
1st
Previous
Next
Bottom
Just 41st

subsidiaries  for the  foreseeable  future,  all of the deferred tax assets will
likely not be realized and hence a valuation allowance was provided.            

As noted above,  we  recognized  an income tax  provision in 2006 compared to an
income tax benefit for the  comparable  periods in 2005 and 2004.  The effective
tax rate on a consolidated  basis was 13.6% in 2006, (93.9)% in 2005 and (35.8)%
in 2004,  due to the factors noted above.  The effective  rate for our corporate
subsidiaries  that were subject to taxes was (20.6)% in 2006,  58.5% in 2005 and
54.4% in 2004. See Note 12 to the consolidated  financial statements for further
information regarding the effective tax rate.                                   

Results by Segment                                                              
------------------                                                              

PORTFOLIO INVESTING                                                             

The table below shows  selected  information  regarding our Portfolio  Investing
activities:                                                                     

                                                        [Enlarge/Download Table]


                                                                     % Change                   % Change  
                                                                     2006 vs.                   2005 vs.  
              (In thousands)                  2006         2005         2005         2004         2004    
-----------------------------------------  ----------   ----------   ---------    ----------   ---------  
                                                                                                          
New mortgage revenue bond acquisitions     $  298,875   $  378,746       (21.1)%  $  290,967        30.2 %
Funding of mortgage  revenue bonds                                                                        
  acquired in prior years                      24,700        1,800          --        17,735       (89.9) 
Acquisitions related to prior                                                                             
  period forward commitments                   96,365       62,971        53.0        16,395       284.1  
                                           ----------   ----------   ---------    ----------   ---------  
Total acquisition and funding activity     $  419,940   $  443,517        (5.3)%  $  325,097        36.4 %
Forward commitments issued but not funded  $     --     $    8,000          -- %  $   88,676       (91.0)%

Mortgage revenue bonds repaid              $   83,746   $  104,279       (19.7)%  $   26,870       288.1 %

Average portfolio balance (fair                                                                           
  value)                                   $2,560,548   $2,229,654        14.8 %  $1,946,433        14.6 %

Weighted average permanent interest                                                                       
  rate of bonds acquired                         5.99%        6.19%                     6.26%             
Weighted average yield of portfolio              6.72%        6.77%                     6.79%             
Average borrowing rate (1)                       4.17%        3.65%                     2.51%             
Average BMA rate                                 3.45%        2.45%                     1.22%             

Mortgage revenue bond interest income (2)  $  170,273   $  150,222        13.3 %  $  132,815        13.1 %
Other interest income (2)                      19,894       10,602        87.6         7,100        49.3  
Prepayment penalties                            1,662        1,176        41.3            30          --  
Rental income of real estate owned              5,918        3,860        53.3            --          --  
Other revenues (2)                              5,885        3,495        68.4         2,966        17.8  
                                           ----------   ----------   ---------    ----------   ---------  
                                           $  203,632   $  169,355        20.2 %  $  142,911        18.5 %
                                           ==========   ==========   =========    ==========   =========  

Interest expense and securitization                                                                       
  fees (2)                                 $   97,233   $   53,617        81.3 %  $   32,373        65.6 %

Loss on impairment of assets               $    5,003   $    4,555         9.8 %  $      757       501.7 %

Gain on termination of CCA loan            $    6,916   $       --          -- %  $       --          -- %
Gain on repayments of mortgage                                                                            
  revenue bonds                            $    1,048   $    1,523       (31.2)%  $      217       601.8 %
                                           ----------   ----------   ---------    ----------   ---------  

CAD                                        $  101,022   $  102,927        (1.9)%  $  106,317        (3.2)%
                                           ----------   ----------   ---------    ----------   ---------  


(1)  Includes  effect  of  swaps  and in  2006,  incremental  costs  related  to
restructuring of our securitization programs.                         
(2)  Prior to intersegment eliminations.                                        

The  increase in mortgage  revenue  bond  interest  income is  primarily  due to
expanding  our revenue  bond  portfolio  in 2005 and 2006,  although the rate of
investment has slowed due to challenging  market  conditions we have experienced
since 2004. Also included in mortgage revenue bond interest income is contingent
interest  of  approximately  $5.2  million  in 2006,  $2.6  million  in 2005 and
$230,000 in 2004, related to bonds prepaid during those years.                  

Other  interest  income in this  segment  is  predominantly  interest  income on
investments  other  than  mortgage  revenue  bonds  and  intercompany   interest
eliminated  in  consolidation.  The higher  level of income in the 2006 and 2005
periods  relates  primarily  to increased  intercompany  lending to utilize this
segment's cash flow,  offset by a lower level of outside  investments  following

41

10-K
42nd Page of 151
TOC
1st
Previous
Next
Bottom
Just 42nd

the conversion of loans to equity in relation to the CCLP and ARCap acquisitions
in 2005 and 2006 and the CCA loan termination in 2006.                          

The  level of  prepayment  penalties  we record as  income  can be  expected  to
increase  as  several  older,  higher-yielding  mortgage  revenue  bonds  in our
portfolio  reach the end of lock-out  periods.  In 2006, one borrower  prepaid a
bond resulting in a $1.0 million gain on repayment.                             

Rental income of real estate owned  pertains to the  operations of properties on
which we foreclosed  during the second quarter of 2005. The 2006 period includes
a full  year of  operations  while  the 2005  results  represent  only a partial
period.                                                                         

While the decline in interest rates for new  investments  has gradually  lowered
the average yield of our portfolio, from an income perspective, the low interest
rate  environment  has  been  favorable  for  us.  Although  the BMA  rate,  the
short-term  tax-exempt index,  increased markedly in 2006 and 2005, our weighted
average cost of debt associated with these investments,  taking our hedging into
effect,  continues to allow us to recognize spreads of several percentage points
between our cost of borrowing and the interest rates earned.  Corresponding with
an increase  in the  average  portfolio  balance,  our level of  securitizations
increased  and,  along with a higher  average  borrowing  rate,  resulted in the
increase  in  interest  expense  and  securitization  fees.  In  addition,   the
restructuring of our  securitizations  in 2006 resulted in incremental  interest
costs of approximately $2.6 million.                                            

While our  borrowing  costs have been  increasing  along with market  rates,  we
expect  the   commencement  of  Centerbrook,   our  new  credit   intermediation
subsidiary, will help enable us to retain a significant portion of fees which we
historically have paid to third parties. In addition, we anticipate  Centerbrook
will  enable us to obtain  better  leverage  against  our  assets  and lower our
average cost of capital.  Also, the fixed rate securitization we entered into in
2006 should serve to temper our exposure to interest rate increases.            

Impairment   losses  pertain  to  the   restructuring   of  bond  terms  or  the
deterioration  of  operations  that  indicate  that  full  balances  may  not be
recoverable.  We recognized  impairment on eight  mortgage  revenue bonds in the
2006 period with seven underlying properties, four in the 2005 period with three
underlying  properties and one in the 2004 period with one underlying  property.
While the number of  impairments  increased in the 2006 period,  the losses have
declined in comparison with the growth rate of the portfolio.                   

CAD in this  segment  declined in 2006 from the 2005 period  level due to higher
borrowing costs from steadily  increasing interest rates and charges recorded in
2006 associated with restructuring of our securitization programs. These factors
were partially  offset by a $6.0 million cash  termination fee received upon the
termination of the loan to CCA and a sharply higher level of prepayment  penalty
income.  CAD  declined  in 2005 as  compared  to 2004 due  primarily  to  higher
borrowing costs from increasing  interest rates,  partially  offset by increased
interest income from revenue bond portfolio expansion from 2004 to 2005.        

42

10-K
43rd Page of 151
TOC
1st
Previous
Next
Bottom
Just 43rd

FUND MANAGEMENT                                                                 

The  table  below  shows  selected  information  regarding  our Fund  Management
activities for the years ended December 31:                                     

                                                        [Enlarge/Download Table]


                                                                     % Change                 % Change   
                                                                      2006 vs.                 2005 vs.  
              (In thousands)                    2006        2005       2005          2004        2004    
-------------------------------------------  ----------  ----------  ---------    ----------  ---------  
                                                                                                         

Equity raised by LIHTC funds                 $1,184,321  $1,131,274        4.7 %  $1,143,379       (1.1)%
Equity invested by LIHTC funds (1)           $1,113,289  $1,074,457        3.6 %  $  972,477       10.5 %

Fees based on equity raised (2)              $   14,739  $   16,211       (9.1)%  $   11,003       47.3 %
Fees based on equity invested (2)            $   46,737  $   45,733        2.2 %  $   41,970        9.0 %

Fees based on management of other entities:                                                              
Asset management and partnership fees (2)    $    29,53  $   28,888        2.2 %  $   18,632       55.0 %
Investment origination fees (2)                     377         592      (36.3)          590        0.3  
Other (2)                                           101          60       68.3             1         --  
                                             ----------  ----------  ---------    ----------  ---------  
Subtotal                                         30,011      29,540        1.6        19,223       53.7  
                                             ----------  ----------  ---------    ----------  ---------  

Total fund sponsorship fees (2)                  91,487      91,484         --        72,196       26.7  

Credit intermediation fees (2)                   11,475       9,845       16.6        10,085       (2.4) 
Expense reimbursement (2)                        12,816       9,409       36.2         7,142       31.7  
Construction fees (2)                             4,801       4,583        4.8         1,445      217.2  
Other interest income (2)                         7,013         236         --           110      114.5  
Other revenues (2)                                3,773       2,195       71.9         1,685       30.3  
                                             ----------  ----------  ---------    ----------  ---------  
Total                                        $  131,365  $  117,752       11.6 %  $   92,663       27.1 %
                                             ----------  ----------  ---------    ----------  ---------  

Equity income from CMBS and Direct                                                                       
  Loan funds (2)                             $   15,284  $       --         -- %  $       --         -- %
                                             ----------  ----------  ---------    ----------  ---------  

CAD                                          $   59,550  $   58,010        2.7 %  $   52,215       11.1 %
                                             ----------  ----------  ---------    ----------  ---------  


(1)  Excludes warehoused  properties that have not yet closed into an investment
fund.                                                                 
(2)  Prior to intersegment eliminations.                                        

Our  Fund  Management  activities  generate  origination  and  acquisition  fees
associated with sponsoring tax credit equity  investment funds and for assisting
the funds in acquiring assets, which we recognize when the equity is invested by
the investment  fund. We also receive  partnership and asset management fees for
the  services  we  perform  for the  funds  once  they are  operating,  which we
recognize over the service periods.  As many of our revenues are recognized over
time  following  the  sponsorship  of a new  fund,  many of the  2006  and  2005
increases relate to the funds closed in 2004 and 2005.                          

FEES BASED ON EQUITY RAISED                                                     

We earn  Organization  and Offering  ("O&O") service and partnership  management
fees based upon the level of equity we raise for  tax-credit  equity funds.  O&O
service fees are realized  immediately while we earn the partnership  management
fees over five-year periods.                                                    

Fees  earned for O&O  services  decreased  approximately  20.2% to $7.8  million
compared to $9.8 million in the 2005 period  primarily due a decrease in the fee
rate realized stemming from heightened  competition relating to certain types of
funds,  offset by an increase in equity  raised.  These same revenues  increased
approximately  3.5% compared to $9.5 million in the 2004 period primarily due to
the increase in the fee rate realized,  offset by a marginal  decrease in equity
raised.                                                                         

Partnership  management fees revenues increased  approximately  30.2% in 2006 to
$6.9 million  compared to $5.3  million for the same period in 2005.  These same
revenues increased approximately 245.6% in 2005 compared to $1.5 million for the
same period in 2004. This increase is primarily the result of fund  sponsorships
completed during the three year period increasing the amount of deferred revenue
being amortized over that period.                                               

43

10-K
44th Page of 151
TOC
1st
Previous
Next
Bottom
Just 44th

FEES BASED ON EQUITY INVESTED                                                   

We earn property acquisition fees and acquisition  allowance fees based upon the
level of fund equity invested,  which varies due to the timing of fund closures.
While we acquire  properties on an ongoing basis  throughout the year, we do not
recognize  revenue until we place the property in a sponsored  fund.  Therefore,
delays in timing of a fund closure may impact the level of revenues we recognize
in a given period.                                                              

These fees increased to  approximately  $46.7 million in 2006,  representing  an
approximate 2.2% increase compared to the 2005 results.  The increase in fees is
comparable to the increase in funds originated.                                 

These fees increased to  approximately  $45.7 million in 2005,  representing  an
approximate 9.0% increase compared to the 2004 results.  The increase in fees is
lower than the increase of equity invested because of a decrease in the fee rate
realized, stemming from changes in the mix of funds originated.                 

FEES BASED ON MANAGEMENT OF OTHER ENTITIES                                      

The increase in asset management and partnership fees is attributable to:       

     o    the  higher  level  of  assets  under  management  as we  add  to  the
          population of funds sponsored (with 10 added in 2006 and nine added in
2005); and                                                  
     o    the  improvement  of the cash  position  of certain  investment  funds
          allowing  us to  collect  management  fees  in 2005  which  we did not
     previously recognize until collectability was reasonably assured.

The 2006 increase was partially  offset due the reduction of the cash  positions
of  certain  investment  funds  over the  prior  year  which  prevented  us from
recognizing any management fees for these funds in 2006 since  collectability is
not reasonably assured.                                                         

Fees earned from AMAC helped to increase our  partnership  and asset  management
fees in 2005 as we earned $1.9 million in incentive fees. We earned no incentive
management fees in 2006 or 2004.                                                

OTHER INTEREST INCOME                                                           

Other interest income in 2006 includes interest on resecuritization certificates
held by ARCap and other  temporary  investments.  The  increase in 2006  relates
entirely to the ARCap acquisition.                                              

OTHER REVENUES                                                                  

Credit  intermediation,  expense  reimbursement,  construction  fees  and  other
revenues in this  segment  consist  largely of service  fees charged to entities
(including consolidated partnerships) we manage and fluctuate with the growth of
the number of those entities and their cash flows.                              

Credit  intermediation  fees  increased  over  the  three  year  period  due  to
additional credit  intermediated funds being closed over the same period and the
launch of Centerbrook in 2006.                                                  

We anticipate  that the market for tax credit equity  investing will continue to
be strong in the near term but that  heightened  competition in the  marketplace
will lead to margin compression.  We expect,  however, that the launching of our
in-house  credit  intermediation  business will offset the impact of that margin
compression  from a net income  perspective  as we are likely to retain  amounts
previously paid or shared for credit  intermediation and for providing specified
rates of return to fund investors.                                              

EQUITY INCOME                                                                   

We are  general  partner of the CMBS and Direct  Loan funds we sponsor and own a
portion of the funds.  Equity income in this segment  primarily  represents  our
proportionate  share of profits as well as other allocations for general partner
services.   This  category  became  a  part  of  this  segment  upon  the  ARCap
acquisition.                                                                    

44

10-K
45th Page of 151
TOC
1st
Previous
Next
Bottom
Just 45th

Segment CAD  increased  over the three year period due  predominantly  to higher
fund  sponsorship  activity and the up-front fees received in the  transactions.
For 2006,  the addition of equity  income from the CMBS and Direct Loan funds to
this segment with the  acquisition  of ARCap also benefited the CAD results as a
portion of the income  recognized  is cash  based.  These  gains were  partially
offset each year by higher  infrastructure  costs in expanding  the business and
for 2006, by initial start-up costs associated with the Centerbrook business.   

MORTGAGE BANKING                                                                

The table  below shows  selected  information  regarding  our  Mortgage  Banking
activities for the years ended December 31:                                     

                                                        [Enlarge/Download Table]


                                                                % Change                 % Change  
                                                                2006 vs.                 2005 vs.  
           (In thousands)                 2006        2005        2005         2004        2004    
------------------------------------  -----------  -----------  --------    -----------  --------  
                                                                                                   
Originations                          $ 1,541,797  $ 1,278,448      20.6 %  $   838,162      52.5 %
Mortgage portfolio at December 31:                                                                 
   Primary servicing                  $ 9,624,571  $ 9,050,576       6.3 %  $ 3,852,529     134.9 %
   Interim servicing                   11,707,108           --        --             --        --  
   Special servicing                      201,207           --        --             --        --  
Carrying value of mortgage servicing                                                               
   rights at December 31              $    68,875  $    62,190      10.7 %  $    32,366      92.1 %
                                      -----------  -----------  --------    -----------  --------  

Mortgage origination fees (1)         $     9,136  $     7,454      22.6 %  $     5,455      36.6 %
Servicing fees (1)                         21,985       18,928      16.2          9,571      97.8  
Assumption fees (1)                         3,383          887     281.4            220     303.2  
                                      -----------  -----------  --------    -----------  --------  
Total fee income                           34,504       27,269      26.5         15,246      78.9  

Other interest income (1)                  20,893       10,150     105.8          3,217     215.5  
Prepayment penalties (1)                    5,194        5,150       0.9          1,846     179.0  
Other revenues (1)                          2,206        1,003     119.9            719      39.5  
                                      -----------  -----------  --------    -----------  --------  
                                      $    62,797  $    43,572      44.1 %  $    21,028     107.2 %
                                      ===========  ===========  ========    ===========  ========  

Gain on sale of mortgages             $    10,334  $     6,501      59.0 %  $     7,651     (15.0)%
                                      -----------  -----------  --------    -----------  --------  

CAD                                   $    20,199  $    14,871      35.8 %  $     4,388     238.9 %
                                      -----------  -----------  --------    -----------  --------  


(1)  Prior to intersegment eliminations.                                        

Revenues  in  2006  and  2005  increased  in  this  segment  largely  due to the
acquisitions  of ARCap in August 2006 and of CCLP in March 2005.  Including  all
businesses  for all periods,  the 2006  increase  would have been  approximately
12.0% over 2005, and the 2005 increase would have been approximately  12.6% over
2004.                                                                           

Originations for the three-years ended December 31 are broken down as follows:  

                                                                [Download Table]

                                 % of                  % of                  % of  
  (In thousands)      2006      Total       2005      Total       2004      Total  
-----------------  ----------  -------   ----------  -------   ----------  ------- 
                                                                                   
Fannie Mae         $  620,583     40.3%  $  705,024     55.1%  $  284,479     33.9%
Freddie Mac           280,093     18.2      160,835     12.6      326,391     38.9 
CharterMac Direct     535,554     34.7           --       --           --       -- 
Conduit and other     105,567      6.8      412,589     32.3      227,292     27.2 
                   ----------  -------   ----------  -------   ----------  ------- 

Total              $1,541,797    100.0%  $1,278,448    100.0%  $  838,162    100.0%
                   ==========  =======   ==========  =======   ==========  ======= 


Origination fees increased primarily due to the increase in originations. Fannie
Mae and conduit originations  decreased and CharterMac Direct increased from the
2005 period because the loan production staff focused its efforts on originating
loans for CharterMac  Direct,  which was launched in late 2005 and through which
we  originate  loans for AMAC and  ARESS.  Freddie  Mac  originations  increased
sharply due to three large portfolio  transactions  totaling $123 million in the
2006 period and our participation in the Freddie Mac DUI program.               

With the ARCap acquisition, our servicing portfolio has expanded to include both
special  servicing and interim  servicing,  which entails  short-term  servicing
conduits prior to the issuance of their securitizations.                        

The activity  gains in 2005 stemmed  from a  significant  increase in Fannie Mae
originations,  as  CCLP  had  traditionally  conducted  a large  portion  of its
business  through  Fannie Mae,  and pricing  changes  that  allowed us to garner

45

10-K
46th Page of 151
TOC
1st
Previous
Next
Bottom
Just 46th

greater  market  share.  Conduit  originations  also  increased  sharply  as  we
continued  to pursue  business  not  involving  agency  execution in response to
market  demand.  These  increases  were  partially  offset by a sharp decline in
Freddie Mac business,  as the 2004 period reflects a large  single-borrower pool
transaction, with no comparable transaction in the 2005 period.                 

A  significantly  higher level of assumption fees were earned over the course of
the three year period for when a new borrower  assumes the obligation for a loan
in the  servicing  portfolio.  The higher  volume of  assumptions  stemmed  from
increasing sales of underlying  properties for which the existing  borrowers did
not wish to pay prepayment penalties.                                           

Despite the high volume of originations in 2005 and 2006, our primary  servicing
portfolio at December 31, 2006 declined from the 2005 level due to a high volume
of loans paid off each year coupled with a high percentage of  originations  for
loans without associated servicing.                                             

Adjusting  for the  impact of the CCLP and  ARCap  acquisitions,  servicing  fee
income in 2006  declined  approximately  14.8% as compared to the same period in
2005, while 2005 servicing fee income increased  approximately 20.9% as compared
to the same  period  in 2004.  The 2006  decline  is due to the  erosion  of the
primary  servicing rate due to the higher  proportion of non-agency loans in the
portfolio. This trend has also affected the level of mortgage service rights, as
write-offs in connection  with the  prepayment of mortgages at higher  servicing
rights are replaced with new assets generating lower fee streams.  Generally, as
our prepayments  have increased,  our mortgage  servicing rights have decreased.
This  decrease is partially  offset by an increase in the average loan  balances
serviced by ARCap in 2006 over 2005.  The 2005  increase is due to a significant
increase in the average loan balances serviced by ARCap over 2004.              

Interest  income  relates  primarily  to that  earned  on escrow  balances.  The
increases in 2006 and 2005 resulted from higher  account  balances and increased
market rates earned.  Interest  income also  increased due to the CCLP and ARCap
acquisitions.                                                                   

Gain on sale of  mortgages  relates  directly to the value of  mortgage  service
rights recorded when loans are sold. The mortgage  service rights,  in turn, are
valued based on projected  servicing  revenues,  which,  excluding  the mortgage
service  rights of $15.2  million  acquired  as part of the  ARCap  acquisition,
decreased in 2006 as compared to 2005 due to erosion of servicing  fee rates for
new originations as discussed above. An increase in 2005 as compared to 2004 due
to the  increased  origination  volume was offset by a higher  reserve  for loan
losses,  due to the increased volume and the underlying debt service  statistics
in the portfolio.                                                               

Segment CAD  increased  over the three year period due  primarily  to  increased
servicing  fees and  interest  income on  escrow  accounts.  Both of these  were
attributable  to the  expansion  of our business as well as the  acquisition  of
ARCap in 2006 and CCLP in 2005, and the higher  interest  income was also due in
part to increasing interest rates in 2005 and 2006. The increases were partially
offset  each  year by a  higher  level  of  ongoing  infrastructure  costs as we
continue to grow the business and, in 2006, by  restructuring  costs recorded in
connection with the ARCap acquisition. We expect that the continued expansion of
this business and the expected synergies from combining existing operations with
ARCap should benefit segment CAD in future periods.                             

We anticipate  that the  continued  growth of the  securitized  loan market will
result in an increase in the  proportion of our conduit  executions to the total
in coming years. We expect that our affiliations  with pension fund advisors and
AMAC will aid this growth. In addition,  the increased  customer base that comes
with  CharterMac's  overall  expansion  through  acquisitions and organic growth
should  increase our  origination  volume as we further  develop our  integrated
infrastructure. The availability of the significant level of debt capital in the
market and general compression of fees industry-wide, however, are likely to put
pressure  on our fee revenue  and  margins  for the  foreseeable  future and may
offset some of the profits expected from volume gains.                          

46

10-K
47th Page of 151
TOC
1st
Previous
Next
Bottom
Just 47th

CONSOLIDATED PARTNERSHIPS                                                       

The results of consolidated partnerships reflected in our consolidated financial
statements are for entities we control according to the definitions of FIN 46(R)
and similar accounting  pronouncements.  With respect to the more than 130 LIHTC
and Property  partnerships,  we have no equity interest or, in the case of 38 of
the  partnerships,  an insignificant  equity interest.  With respect to CMBS and
Direct Loan  partnerships,  we have ownership of varying  degrees,  but all less
than 25%.                                                                       

LIHTC AND PROPERTY PARTNERSHIPS                                       

     Our Fund Management  segment earns fees from many of the entities,  and our
     Portfolio  Investing  business earns interest on mortgage revenue bonds for
     which these  partnerships are the obligors.  The consolidated  partnerships
     are  primarily tax credit  equity  investment  funds we sponsor and manage,
     while the others are property level  partnerships for which we have assumed
the role of general partner.                                          

     The increased revenue,  expense, equity loss and allocation amounts in 2006
     are due principally to the origination of 10 funds in the past year and the
     assumption  of  the  general   partner   interests  in  20  property  level
partnerships during 2006.                                             

     The increased revenue,  expense, equity loss and allocation amounts in 2005
     are due to the  origination of nine funds and the assumption of the general
     partner  interests in 12 property  level  partnerships  during 2005, all of
which are included in the population.                                 

     As third  party  investors  hold  virtually  all of the equity  partnership
     interests in these entities, we allocate all results of operations to those
     partners  except  for  approximately  $10,000,   representing  our  nominal
     ownership.  As a result,  the  consolidation  of these  partnerships has an
insignificant impact on our net income.                               

CMBS AND DIRECT LOAN PARTNERSHIPS                                     

     CMBS and Direct Loan Partnerships were incorporated upon our acquisition of
     ARCap in August 2006 and as such,  there is no comparable  information  for
2005 and 2004.                                                        

Inflation                                                                       
---------                                                                       

Inflation  did not  have a  material  effect  on our  results  for  the  periods
presented.                                                                      

Liquidity and Capital Resources                                                 
-------------------------------                                                 

We fund our short-term  business needs  (including  investments)  primarily with
cash  provided  by  operations,   securitization   of  investments,   repurchase
agreements and revolving or warehouse credit facilities.  Our primary sources of
capital to meet long-term liquidity needs (including  acquisitions) are debt and
various types of equity  offerings,  including  equity of our  subsidiaries.  We
believe that our financing  capacity and cash flow from current  operations  are
adequate  to  meet  our   immediate  and  long  term   liquidity   requirements.
Nonetheless,  as  business  needs  warrant,  we may issue other types of debt or
equity in the future.                                                           

DEBT AND SECURITIZATIONS                                                        
------------------------                                                        

Short-term liquidity provided by operations comes primarily from interest income
from  mortgage  revenue  bonds and  promissory  notes in  excess of the  related
financing  costs  and fee  income  receipts.  We  typically  generate  funds for
investment purposes from corresponding financing activities.                    

We have the following debt and  securitization  facilities to provide short-term
and long-term liquidity:                                                        

     o    a $100.0  million  warehouse  line,  used for mortgage  banking needs,
          which matures in May 2007,  and we expect to enter into a new facility
or a further extension of this line upon maturity;          
     o    a $250.0 million  revolving  credit  facility,  used to acquire equity
          interests in property  ownership  entities  prior to the  inclusion of
          these equity  interests into  investment  funds,  as well as for other
corporate purposes, which matures in August 2009;           

47

10-K
48th Page of 151
TOC
1st
Previous
Next
Bottom
Just 48th

     o    securitizations  through the Merrill Lynch P-FLOATs/RITES  program and
          through  the  Goldman  Sachs  Floats/Residuals  program of a specified
          percentage  of the fair value of mortgage  revenue bonds not otherwise
securitized or pledged as collateral; and                   
     o    repurchase  facilities  used  to fund  investments  by  ARCap  and its
subsidiaries as well as for general business purposes.      

As of December 31, 2006, we had approximately $145.6 million available to borrow
under these debt and securitization  facilities without exceeding limits imposed
by debt covenants and our by-laws and without pledging additional collateral.   

In  addition  to the  credit  lines  detailed  above,  we have a $453.0  million
fixed-rate mortgage revenue bond securitization  program and $250.0 million term
loan, both of which began in 2006 and were fully funded as of December 31, 2006.
The securitization  certificates have a weighted average term of eight years and
the term loan matures in 2012.                                                  

We continue to actively  manage our balance sheet and our lending  relationships
and to continue to  diversify  our sources of  capital.  Although  the  mortgage
banking warehouse line matures in 2007, we expect to renew, replace or refinance
it. While we believe  that we will be able to do so, there is no assurance  that
we will achieve  terms  favorable  to us. Also,  while we intend to optimize our
securitization borrowing, our continued ability to do so is dependent on:       

     o    the availability of bonds to be used in  securitizations  or as excess
collateral;                                                 
     o    the  depth of the  market  of  buyers  for  tax-exempt  floating  rate
investments; and                                            
     o    our  ability to  maintain  and expand our  relationships  with  credit
intermediators and liquidity providers.                     

Our debt financing  facilities are more fully  described in Notes 8 and 9 to our
consolidated financial statements.                                              

EQUITY                                                                          
------                                                                          

Other than our common  shares,  we have several  classes of equity  outstanding,
with varying claims upon our income and cash flows:                             

     o    Convertible Community  Reinvestment Act Preferred Shares ("Convertible
CRA Shares");                                               
     o    4.4% Perpetual Convertible Community Reinvestment Act Preferred Shares
("4.4% Convertible CRA Shares");                            
     o    Preferred  shares  of Equity  Issuer  (some of which  are  subject  to
mandatory repurchase);                                      
o    SCUs of our subsidiary, CharterMac Capital Company LLC ("CCC");  
o    SMUs of our subsidiary CM Investor, LLC; and                     
o    SCIs of our subsidiary ARCap.                                    

The  Convertible  CRA Shares are  economically  equivalent to our common shares,
receiving the same dividend. Unlike the common shares, however, these shares are
not  publicly  traded and do not have  voting  rights but entitle the holders to
"credit" under the US government's  Community Reinvestment Act. These shares are
convertible into common shares at the holders'  option,  mostly on a one-for-one
basis. We first issued Convertible CRA Shares during 2000 and the program became
popular  with a broad  range of banks that  invest in our shares to both make an
investment in us and to make qualifying Community Reinvestment Act investments. 

The 4.4%  Convertible  CRA Shares are similar to the  Convertible  CRA Shares in
that they  entitle the holder to CRA "credit"  and are  convertible  into common
shares without having voting rights prior to conversion.  Unlike the Convertible
CRA  Shares,  however,  these  shares  carry a fixed  dividend  and each will be
convertible  into common shares at a rate of  approximately  1.81:1 beginning in
July 2008.                                                                      

The preferred  shares of Equity  Issuer  entitle their holders to a claim on the
income and cash flows of most of our Portfolio Investing business.  They have no
voting rights with respect to CharterMac and are not convertible into CharterMac
common shares.                                                                  

The SCUs  entitle  their  holders  to a claim on the  income  and cash  flows of
certain of our subsidiaries  through which we operate our LIHTC fund sponsorship
business. The SCUs have no direct voting rights with respect to CharterMac,  but

48

10-K
49th Page of 151
TOC
1st
Previous
Next
Bottom
Just 49th

all of the holders  also have special  preferred  voting  shares of  CharterMac,
which  have  voting  rights  equivalent  to our  common  shares.  The  SCUs  are
convertible  into  common  shares on a  one-for-one  basis and are  entitled  to
tax-adjusted dividends based on the common dividend rate.                       

SMU holders are entitled to  distributions  at the same time as, and only if, we
pay  distributions on our common shares.  SMU  distributions are currently $1.73
per year, subject to adjustment in the amount of 95% of the percentage increases
or  decreases in the  dividends  paid by us on the common  shares.  The SMUs are
convertible into common shares on a one-for-one basis.                          

SCI holders are entitled to  distributions  at the same time as, and only if, we
pay  distributions on our common shares.  SCI  distributions are currently $1.72
per year,  subject  to an  adjustment  in the  amount  of 95% of the  percentage
increases or decreases in the  dividends  paid by us on our common  shares.  The
SCIs are convertible into common shares on a one-for-one basis.                 

In October  2004, we filed a shelf  registration  with the SEC providing for the
issuance of up to $400.0  million in common  shares,  preferred  shares and debt
securities.  The shelf  registration was declared effective on March 1, 2005 and
was available for use beginning  April 1, 2006. We have no current plans to draw
upon this shelf  registration  but may as  opportunities  present  themselves or
business requirements dictate.                                                  

Further  information about our equity instruments is included in Notes 13 and 14
to our consolidated financial statements.                                       

SUMMARY OF CASH FLOWS                                                           

2006 vs. 2005                                                                   
-------------                                                                   

For the year ended December 31, 2006, cash and cash  equivalents  increased by a
smaller  amount than in the  comparable  2005 period.  A sharp  increase in 2006
operating  cash flows was more than offset by increased  investing cash outflows
and less cash provided by financing activities.                                 

Operating  cash  flows  in 2006  were  $86.0  million  higher  than in 2005  due
primarily to a sharp reduction in the level of mortgage loans receivable  during
2006 as a result of the high level of December 2005  originations  that were not
sold  until the first  quarter  of 2006.  Conversely,  in the 2005  period,  the
increasing level of originations  following the CCLP  acquisition  resulted in a
net addition to the asset balance during that period.  In addition,  liabilities
increased  in the 2006  period  to a greater  extent  than in 2005 due to higher
collections of deferred  revenues in connection with fund origination  activity.
These  increases  were  partially  offset by  increased  collateral  deposits in
connection with Centerbrook and higher  receivable  balances,  particularly with
respect to advances to partnerships.                                            

Cash used in  investing  activities  was higher in 2006 as compared to 2005 by a
margin of $150.9 million primarily due to the ARCap acquisition,  offset in part
by an investment  sold to AMAC in April 2006, a decrease in restricted  cash due
to reduced  restricted cash requirements when we restructured our securitization
programs and returns of capital from ARCap prior to our acquisition.            

Financing  inflows in the 2006 period  were lower than in 2005 by $7.5  million.
While  we  borrowed   through  a  new  credit  facility  to  finance  the  ARCap
acquisition,  the level of  financing  inflows  was offset by the  repayment  of
warehouse line  borrowings  associated with 2006 mortgage loan sales as noted in
the  discussion  of  operating  cash flows  above.  Also  included in  financing
activities are the proceeds and repayments  related to the  restructuring of our
securitization   programs  and  borrowings  to  capitalize   Centerbrook.   Also
contributing to the overall decrease in financing activities were treasury stock
purchases made during the year.                                                 

2005 vs. 2004                                                                   
-------------                                                                   

The larger  increase  in cash and cash  equivalents  in 2005 as compared to 2004
resulted  principally from increased  financing cash flows that offset a decline
in cash provided by operating activities.                                       

Operating cash flows decreased by $105.7 million in 2005 as compared to the 2004
level,  due primarily to the high level of mortgage  originations  at the end of
2005.  While the assets were sold in the first quarter of 2006,  the increase in

49

10-K
50th Page of 151
TOC
1st
Previous
Next
Bottom
Just 50th

the level of  mortgage  assets  held at the end of the year served to offset the
increase in net income exclusive of non-cash expenses and charges.              

Investing  outflows  in 2005  were  approximately  the  same as in 2004  despite
increased  mortgage revenue bond acquisitions (net of repayments) and restricted
cash  requirements  as we  expanded  the  Mortgage  Banking  segment.  Investing
activities  in 2004  included a higher level of investing  outside of our normal
business  lines,  most  notably the loan to Capri,  while 2005  included a $26.0
million  co-investment with AMAC in a first mortgage loan, and other investments
that aggregated less than $10.0 million.                                        

Financing  inflows in 2005 were $183.0  million  higher  than in 2004.  This was
primarily a result of  optimizing  our  securitization  capabilities  and taking
advantage of these  facilities to monetize our mortgage  revenue bond investment
portfolio,  the  expansion of our Mortgage  Banking  borrowing  capacity and the
issuance of our 4.4% Convertible CRA Shares. These factors collectively exceeded
the higher level of equity issuances (including subsidiary equity) in 2004.     

LIQUIDITY REQUIREMENTS AFTER DECEMBER 31, 2006                                  
----------------------------------------------                                  

During February 2007, equity distributions were paid as follows:                

                          (In thousands)
                          --------------
Common/CRA shareholders                           $25,201                       
SCU/SMU/SCI holders                                 8,884                       
4.4% CRA Preferred shareholders                     1,188                       
Equity Issuer Preferred shareholders                6,281                       
                           -------
Total                                           $41,554                     
                           =======

Subsequent  to December 31,  2006,  we paid down the CMC  warehouse  line as the
temporary  expansion of the facility expired February 1, 2007 (see Note 9 to the
consolidated financial statements).                                             

Management is not aware of any trends or events,  commitments or  uncertainties,
which  have not  otherwise  been  disclosed  that  will or are  likely to impact
liquidity in a material way (see also CONTINGENT LIABILITIES below).            

Contractual Obligations                                                         
-----------------------                                                         

The following  table  provides our  commitments as of December 31, 2006, to make
future payments under our debt agreements and other contractual obligations:    

                                                        [Enlarge/Download Table]


                                                             Payments due by period                          
                                     ----------------------------------------------------------------------- 
                                                     Less than                                    More than  
          (In thousands)                Total          1 year       1-3 years      3-5 years       5 years   
-----------------------------------  -----------    -----------    -----------    -----------    ----------- 
                                                                                                             
Notes payable (1)(2)                 $   591,165    $   166,165    $   182,500    $     5,000    $   237,500 
Notes payable of consolidated                                                                                
  partnerships (3)                       594,477         66,679        155,250         29,032        343,516 
Repurchase agreements of                                                                                     
  consolidated partnerships (1)          942,224        255,823          7,135        149,009        530,257 
Operating lease obligations               79,205          8,717         17,093         15,445         37,950 
Subleases                                 (7,984)        (1,174)        (2,581)        (2,610)        (1,619)
Unfunded investment commitments (4)      231,518        144,180         87,338             --             -- 
Financing arrangements (1)(2)          1,801,780      1,801,780             --             --             -- 
Preferred shares of subsidiary                                                                               
  (subject to mandatory repurchase)      273,500             --             --             --         273,500
                                     -----------    -----------    -----------    -----------     -----------

   Total                             $ 4,505,885    $ 2,442,170    $   446,735    $   195,876     $ 1,421,104
                                     ===========    ===========    ===========    ===========     ===========


(1) The amounts included in each category reflect the current expiration,  reset
or renewal date of each  facility or security  certificate.  Management  has the
ability and intent to renew,  refinance or remarket the borrowings  beyond their
current due dates as described in LIQUIDITY AND CAPITAL RESOURCES.              

(2)  Recourse  debt  represents  principal  amount only and  therefore  does not
include accrued interest of $5.8 million.  The weighted average interest rate at
December 31, 2006, including the impact of our swaps, was 5.32%.                

50

10-K
51st Page of 151
TOC
1st
Previous
Next
Bottom
Just 51st

(3) Of the notes  payable  of  consolidated  partnerships,  $444.3  million  are
collateralized  by  equity  subscriptions  of  certain  equity  partners  of the
investment  funds.  Per  partnership  agreements,  the equity  partners are also
obligated to pay the principal and interest on the notes. The remaining  balance
of $150.2  million  is  collateralized  with the  underlying  properties  of the
consolidated operating partnerships. All of this debt is non-recourse to us.    

(4)  Of  this  amount,  $181.8  million  represents  mortgage  loan  origination
commitments with corresponding sale commitments.                                

Off Balance Sheet Arrangements                                                  
------------------------------                                                  

The following table reflects our maximum exposure and the carrying amounts as of
December 31, 2006:                                                              

                                                                [Download Table]


                                                        Maximum        Carrying 
               (In thousands)                           Exposure        Amount  
--------------------------------------------           ----------     ----------
                                                                                
Completion guarantees (1)                              $   23,902     $       --
Development deficit guarantees (1)                         44,198            578
Operating deficit guarantees (1)                            7,524            169
ACC transition guarantees (1)                               3,245             --
Recapture guarantees (1)                                  114,703            169
Replacement reserve (1)                                     3,120             48
Guarantee of payment (1)                                   14,720             --
LIHTC credit intermediation (2)                         1,098,475         30,211
Mortgage banking loss sharing agreements (3)              816,321         13,116
                                                       ----------     ----------

                                                       $2,126,208     $   44,291
                                                       ==========     ==========


(1) These guarantees generally relate to business requirements for developers to
obtain  construction  financing.  As part of our role as co-developer of certain
properties,  we issue these  guarantees in order to secure  properties as assets
for the funds we manage.  To date, we have had minimal  exposure to losses under
these   guarantees  and  anticipate  no  material   liquidity   requirements  in
satisfaction of any guarantee issued. The carrying values disclosed above relate
to the  fees we earn for the  transactions,  which we  recognize  as their  fair
values.                                                                         

(2) We see these  transactions  as  opportunities  to expand our Fund Management
business by offering broad capital solutions to customers.  To date, we have had
minimal exposure to losses and anticipate no material liquidity  requirements in
satisfaction of any  arrangement.  The carrying values disclosed above relate to
the fees we earn for the transactions, which we recognize as their fair values. 

(3) The loss  sharing  agreements  with  Fannie Mae and Freddie Mac are a normal
part of the DUS and DUI lender  programs  and afford a higher level of fees than
we earn for other comparable funding sources. The carrying value disclosed above
is our estimate of potential exposure under the guarantees, although any funding
requirements  for such exposure is based on the contractual  requirements of the
underlying  loans we sell to Fannie Mae and Freddie Mac, which vary as to amount
and duration, up to a maximum of 30 years. See also RISK RELATED TO OUR MORTGAGE
BANKING BUSINESS in Item 1A, RISK FACTORS.                                      

The maximum  exposure  amount is not indicative of our expected losses under the
guarantees.  For details of these transactions,  see Note 21 to the consolidated
financial statements.                                                           

Application of Critical Accounting Estimates                                    
--------------------------------------------                                    

Our consolidated financial statements are based on the selection and application
of  accounting  principles  generally  accepted in the United  States of America
("GAAP"),  which require us to make  estimates and  assumptions  that affect the
reported amounts of assets, liabilities,  revenues and expenses. These estimates
and assumptions  sometimes  involve future events that cannot be determined with
absolute certainty.  Therefore,  our determination of estimates requires that we
exercise our judgment.  While we have used our best estimates based on the facts
and  circumstances  available to us at the time,  different results may actually
occur and any such differences  could be material to our consolidated  financial
statements.                                                                     

51

10-K
52nd Page of 151
TOC
1st
Previous
Next
Bottom
Just 52nd

We believe the  following  policies may involve a higher  degree of judgment and
complexity  and  represent  the  critical   accounting   policies  used  in  the
preparation of our consolidated financial statements:                           

o    valuation of investments in mortgage revenue bonds;              
o    valuation of mortgage servicing rights;                          
o    valuation of derivatives;                                        
o    impairment of goodwill and intangible assets; and                
o    accounting for income taxes.                                     

VALUATION OF INVESTMENTS IN MORTGAGE REVENUE BONDS                              

SFAS No. 115,  ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES,
provides guidance on determining the valuation of investments owned. The initial
classification  of our  investments in the "available for sale" category  rather
than as "held to maturity" is due to a provision in most of the mortgage revenue
bonds  under  which we have a right to  require  redemption  prior to  maturity,
although  we can and may elect to hold them up to their  maturity  dates  unless
otherwise  modified,  and the ability of the borrower to prepay the bond after a
lockout period. Because of this classification, we must carry our investments at
fair  value.  Since  there is no ready  market  for these  investments,  we must
exercise  judgment in determining what constitutes "fair value". We estimate the
fair value by calculating  the present value of expected future cash flows under
the bonds. For bonds secured by non-stabilized  properties, the discount rate is
based upon the average rate of new  originations  for the quarter  leading up to
the valuation  date.  For bonds secured by stabilized  properties,  the discount
rate is reflective of the lower  inherent  risk. If the property  underlying the
bond has  substandard  performance,  a factor is added to the  discount  rate to
allow  for the  additional  risk.  Conversely,  if the  underlying  property  is
performing much better than expected,  the discount rate may be reduced to allow
for the reduced risk.                                                           

In making these determinations, we evaluate, among other factors:               

Bonds Secured by Properties in Construction Phase                     
-------------------------------------------------                     

     o    Assets where there are issues outstanding  regarding timely completion
          of the  construction,  even if there is no apparent  risk of financial
loss.                                                       

Bonds Secured by Properties that are in Lease-Up or Stabilized Phases 
--------------------------------------------------------------------- 

     o    Stabilization  requirements  (i.e.,  minimum  occupancy level and debt
          service coverage for specified periods) not yet met but all completion
          requirements  (i.e.,  timely  submission  of  documentation  regarding
          certificates of occupancy,  deal waivers,  etc., as well as completing
construction within the budgeted cost) are met;             
     o    Established material variation from anticipated operating performance,
          ability to meet  stabilization test within the allotted time period is
          in question or material deficiencies at the collateral level, or other
          weaknesses exist calling into question the viability of the project in
the near to intermediate term; or                           
     o    Project  viability is in question and defaults exist and  notification
          of such has been delivered.  Enhanced possibility of loss may exist or
has been specified.                                         

We use these  criteria  to assess  all of our  mortgage  revenue  bonds.  In our
valuation  review,  any bonds meeting these  criteria are monitored and assessed
for risk of other-than-temporary  impairment.  If our analysis indicates that no
other-than-temporary  impairment  has  occurred,  the  fair  value  of a bond is
considered  to be the lower of  outstanding  face amount or the present value of
expected  future cash flows,  with the discount rate adjusted to provide for the
applicable   risk   factors.   If   however,   our   analysis   indicates   that
other-than-temporary  impairment has occurred,  the bond is considered impaired,
is written  down to fair value as  determined  by the present  value of expected
future cash  flows,  and a  corresponding  charge to earnings is recorded in the
statement of income.                                                            

VALUATION OF MORTGAGE SERVICING RIGHTS                                          

SFAS No. 140,  ACCOUNTING  FOR TRANSFERS  AND SERVICING OF FINANCIAL  ASSETS AND
EXTINGUISHMENTS  OF  LIABILITIES,  requires that servicing  rights retained when
mortgage  loans are sold be  recorded as assets at fair value and  amortized  in
proportion  to,  and  over  the  period  of,  estimated  net  servicing  income.
Significant judgment is required in accounting for these assets, including:     

52

10-K
53rd Page of 151
TOC
1st
Previous
Next
Bottom
Just 53rd

     o    Determining  the fair value of the asset  retained when the associated
          mortgage is sold and in subsequent  reporting periods,  including such
          factors  as  costs  to  service  the  loans,  the  estimated  rate  of
          prepayments, the estimated rate of default and an appropriate discount
rate to calculate the present value of cash flows; and      
     o    Estimating  the  appropriate  proportion and period for amortizing the
asset.                                                      

Changes  in  these  estimates  and  assumptions   could  materially  affect  the
determination of fair value.                                                    

We assess our mortgage  servicing  rights for impairment based on the fair value
of the assets as  compared  to carrying  values.  We estimate  the fair value by
obtaining market  information from one of the primary mortgage  servicing rights
brokers. To determine impairment, the mortgage servicing portfolio is stratified
by the risk  characteristics of the underlying mortgage loans and we compare the
estimated fair value of each stratum to its carrying value.  With respect to our
primary  servicing  portfolio,  we have  determined  that the  predominant  risk
characteristic is the absence or presence of loss sharing provisions  associated
with the underlying loans. For our other servicing portfolios we have determined
that the predominant risk characteristic is the ability to generate a consistent
income stream per loan due to the short-term  nature of the loans being serviced
or due to the fact that certain servicing revenues are not recurring.           

When the carrying value of capitalized  servicing  assets exceeds fair value, we
recognize  temporary  impairment  through a valuation  allowance;  fair value in
excess of the amount capitalized is not recognized. In addition, we periodically
evaluate our mortgage  servicing rights for  other-than-temporary  impairment to
determine  whether the carrying  value before the  application  of the valuation
allowance is recoverable. When we determine that a portion of the balance is not
recoverable,  the asset and the  valuation  allowance  are  reduced  to  reflect
permanent impairment.                                                           

VALUATION OF DERIVATIVES                                                        

We  utilize  derivative  financial  instruments  as a means to help  manage  our
interest rate risk exposure on a portion of our variable rate debt  obligations,
through the use of cash flow hedges.  The  instruments  utilized  are  generally
pay-fixed swaps which are widely used in the industry and typically entered into
with major financial  institutions.  Our accounting  policies  generally reflect
these  instruments  at their fair value  with  unrealized  changes in fair value
reflected  in  "accumulated  other  comprehensive  income"  on our  consolidated
balance  sheets.  Realized  effects on cash flows as well as amounts  considered
ineffective are generally recognized currently in income.                       

IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS                                    

SFAS No. 142,  GOODWILL AND OTHER INTANGIBLE  ASSETS,  requires that goodwill be
tested for  impairment at the  reporting  unit level  (operating  segment or one
level below an operating segment) on an annual basis and between annual tests if
an event occurs or  circumstances  change that would more likely than not reduce
the fair value of a reporting  unit below its  carrying  value.  These events or
circumstances could include a significant change in the business climate,  legal
factors, operating performance indicators, competition, sale or disposition of a
significant portion of a reporting unit.  Application of the goodwill impairment
test requires judgment  regarding the fair value of each reporting unit which is
estimated  using a discounted  cash flow  methodology.  This, in turn,  requires
significant  judgments  including  estimation  of future  cash  flows,  which is
dependent on internal forecasts,  estimation of the long-term rate of growth for
our  business  and the life over which cash flows will  occur.  Changes in these
estimates and assumptions  could  materially  affect the  determination  of fair
value and/or goodwill impairment.                                               

In addition, should we determine that goodwill is impaired, we would also review
intangible assets for the same business to determine if they were impaired also.
As with goodwill,  any indicators of impairment of a specific  intangible  asset
would also lead to a review.  As the  methods  for  determining  fair  values of
intangible  assets  are  similar  to those  for  determining  the fair  value of
goodwill,  the same judgments and uncertainties apply to these determinations as
well.                                                                           

ACCOUNTING FOR INCOME TAXES                                                     

SFAS No. 109 establishes  financial  accounting and reporting  standards for the
effect of income taxes.  The  objectives  of accounting  for income taxes are to
recognize  the amount of taxes  payable or  refundable  for the current year and
deferred tax  liabilities  and assets for the future tax  consequences of events
that have been  recognized in an entity's  financial  statements or tax returns.
Judgment is required in  assessing  the future tax  consequences  of events that

53

10-K
54th Page of 151
TOC
1st
Previous
Next
Bottom
Just 54th

have been recognized in our consolidated  financial statements or tax returns as
well as the recoverability of amounts we record,  including deferred tax assets.
Furthermore,  these projected future tax consequences  include our assumption as
to the  continuing  tax-free  nature of a  significant  portion of our earnings.
Variations  in the  actual  outcome  of  these  future  tax  consequences  could
materially impact our financial position or our results of operations.          

Recently Issued Accounting Standards                                            
------------------------------------                                            

In November  2005,  the FASB issued Staff Position 115 / 124 - 1, THE MEANING OF
OTHER-THAN-TEMPORARY  IMPAIRMENT AND ITS APPLICATION TO CERTAIN INVESTMENTS. The
Staff Position clarified,  among other matters,  the determination as to when an
unrealized loss on debt securities  should be reflected in the income  statement
as opposed to accumulated  other  comprehensive  income.  The Staff Position was
effective as of the first quarter of 2006. Application of the Staff Position had
no material impact on our results of operations.                                

During the first quarter of 2006, we adopted  Statement of Financial  Accounting
Standards No. 123(R),  SHARE-BASED  PAYMENT  ("SFAS No.  123(R)") which replaces
SFAS No. 123,  ACCOUNTING FOR STOCK-BASED  COMPENSATION  ("SFAS No. 123"). Among
other things,  SFAS No. 123(R) requires that companies record the value of stock
option grants as compensation expense,  while SFAS No. 123 allowed disclosure of
the impact  instead of recording  the  expense.  As we had been  accounting  for
share-based  payments as an expense  following the fair value provisions of SFAS
No. 123, the impact of adopting  this  standard was not material to us. See also
Note 15 to the consolidated financial statements.                               

In March 2006, the FASB issued Statement of Financial  Accounting  Standards No.
156, ACCOUNTING FOR SERVICING OF FINANCIAL Assets ("SFAS No. 156"). SFAS No. 156
stipulates the accounting for MSRs and requires that they be recorded  initially
at fair value.  SFAS No. 156 also  permits,  but does not  require,  that we may
subsequently  record  those  MSRs at  fair  value  with  changes  in fair  value
recognized in the  statement of  operations.  Alternatively,  we may continue to
amortize the MSRs over their projected  service periods.  We will adopt SFAS No.
156, as  required,  in the first  quarter of 2007 and do not expect any material
impact  in our  consolidated  financial  statements  as we  intend  to  continue
amortization of our MSRs.                                                       

In June 2006, the FASB issued  Interpretation No. 48 ("FIN 48"),  ACCOUNTING FOR
UNCERTAINTY  IN  INCOME  TAXES,  an  interpretation  of  SFAS  No.  109.  FIN 48
prescribes a comprehensive  model for how companies should  recognize,  measure,
present and disclose  uncertain tax positions taken or expected to be taken on a
tax return.  Under FIN 48, we shall  initially  recognize  tax  positions in the
financial  statements  when it is more  likely  than  not the  position  will be
sustained  upon  examination  by the tax  authorities.  We shall  initially  and
subsequently  measure such tax  positions  as the largest  amount of tax benefit
that is greater than 50% likely of being realized upon ultimate  settlement with
the tax  authority  assuming  full  knowledge  of the  position and all relevant
facts. FIN 48 also revises disclosure  requirements to include an annual tabular
rollforward of unrecognized tax benefits.  We will adopt this  interpretation as
required in 2007 and will apply its provisions to all tax positions upon initial
adoption with any cumulative  effect  adjustment  recognized as an adjustment to
retained  earnings.  We are  still  evaluating  the  impact of  adoption  on our
consolidated financial statements.                                              

In September 2006, the FASB issued Statement of Financial  Accounting  Standards
No. 157, FAIR VALUE MEASUREMENTS,  which established a framework for calculating
the  fair  value of  assets  and  liabilities  as  required  by  numerous  other
accounting  pronouncements,  and  expands  disclosure  requirements  of the fair
values of certain assets and  liabilities.  The statement is effective as of our
2008 fiscal year.  We are  currently  evaluating  the impact,  if any,  that the
adoption of this Statement will have on our consolidated financial statements.  

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, CONSIDERING
THE  EFFECTS OF PRIOR  YEAR  MISSTATEMENTS  WHEN  QUANTIFYING  MISSTATEMENTS  IN
CURRENT YEAR FINANCIAL  STATEMENTS  ("SAB 108").  SAB 108 provides  interpretive
guidance  on how  the  effects  of the  carryover  or  reversal  of  prior  year
misstatements  should be considered in quantifying a current year  misstatement.
The SEC staff  believes  that  registrant  should  quantify  errors using both a
balance  sheet and an income  statement  approach  and evaluate  whether  either
approach  results  in  quantifying  a  misstatement   that,  when  all  relevant
quantitative and qualitative  factors are considered,  is material.  SAB 108 was
effective for 2006 and adoption of the SAB did not have a material effect on the
consolidated financial statements.                                              

54

10-K
55th Page of 151
TOC
1st
Previous
Next
Bottom
Just 55th

In February 2007, the FASB issued  Statement of Financial  Accounting  Standards
No. 159, THE FAIR VALUE OPTION FOR FINANCIAL  ASSETS AND FINANCIAL  LIABILITIES.
This Statement permits entities to choose to measure many financial  instruments
and  certain  other  items at fair value that are not  currently  required to be
measured at fair value under  existing GAAP.  This  Statement  also  establishes
presentation  and  disclosure  requirements  designed to facilitate  comparisons
between entities that choose different measurement  attributes for similar types
of  assets  and  liabilities.  This  Statement  does  not  affect  any  existing
accounting literature that requires certain assets and liabilities to be carried
at fair value.  We will adopt the provision of this Statement,  as required,  in
the first quarter of 2008. We are currently  evaluating  the impact of adoption,
if any, on our consolidated financial statements.                               

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.          

We invest in certain financial instruments, primarily mortgage revenue bonds and
other  investments  that are subject to various forms of market risk,  including
interest rate risk. We seek to prudently and actively  manage such risks to earn
sufficient compensation to justify the undertaking of such risks and to maintain
capital levels which are commensurate with the risks we undertake.              

The  assumptions  related to the  following  discussion  of market risk  involve
judgments   involving  future  economic  market  conditions,   future  corporate
decisions and other interrelating  factors, many of which are beyond our control
and all of which are difficult or  impossible to predict with precise  accuracy.
Although  we  believe  that  the  assumptions   underlying  the  forward-looking
information  are  reasonable,  any of the  assumptions  could be inaccurate and,
therefore,  there  can be no  assurance  that  the  forward-looking  information
included herein will prove to be accurate. Due to the significant  uncertainties
inherent in  forward-looking  information,  the  inclusion  of such  information
should not be regarded as our representation that our objectives and plans would
be achieved.                                                                    

INTEREST RATE RISK                                                              
------------------                                                              

The nature of our  investments  and the  instruments  used to raise  capital for
their acquisition expose us to income and expense volatility due to fluctuations
in market  interest rates.  Market  interest rates are highly  sensitive to many
factors,  including governmental  policies,  domestic and international economic
and  political  considerations  and other factors  beyond our control.  A rising
interest rate environment could reduce the demand for multifamily tax-exempt and
taxable  financing,  which could limit our ability to invest in mortgage revenue
bonds or to  structure  transactions.  Conversely,  falling  interest  rates may
prompt historical renters to become homebuyers, in turn potentially reducing the
demand for multifamily housing.                                                 

Our exposure to interest rate is twofold:                                       

     o    the potential  increase in interest expense on our variable rate debt;
and                                                         
o    the impact of interest rates on the fair value of our assets.    

IMPACT ON EARNINGS                                                              

Our  investments  in mortgage  revenue  bonds  generally  bear interest at fixed
rates, or pay interest according to the cash flows of the underlying properties,
which do not fluctuate with changes in market interest rates.                   

In contrast,  payments required under our variable rate securitization  programs
fluctuate  with  market  interest  rates  based on the BMA index and are  re-set
weekly or every 35 days. In addition,  we have variable rate debt related to our
corporate term loan, and revolving credit and warehouse  facilities,  with rates
based on LIBOR. Other long-term sources of capital, such as our preferred shares
of Equity Issuer and our 4.4%  Convertible CRA preferred  shares,  carry a fixed
dividend rate and as such, are not impacted by changes in market interest rates.

With the  exception  of $725.0  million of debt  hedged via  interest  rate swap
agreements,  and a $453.0 fixed rate securitization facility, the full amount of
our  liabilities  labeled  on  our  consolidated   balance  sheet  as  Financing
Arrangements  and Notes  Payable are variable  rate debts.  We estimate  that an
increase  of 1.0% in  interest  rates  would  decrease  our annual net income by
approximately $12.1 million.                                                    

Conversely,  we have large escrow  balances  maintained by our Mortgage  Banking
business and we are entitled to the interest  earned on those  balances.  A 1.0%
increase  in  interest  rates  would  therefore   increase  our  net  income  by
approximately $1.8 million.                                                     

55

10-K
56th Page of 151
TOC
1st
Previous
Next
Bottom
Just 56th

We manage this risk through the use of interest  rate swaps,  interest rate caps
and forward bond origination commitments, as described in Notes 11 and 21 to our
consolidated  financial  statements.  In  addition,  we manage our  exposure  by
striving for diversification in our businesses to include those less susceptible
to interest rate changes and by managing our leverage.                          

IMPACT ON VALUATION OF ASSETS                                                   

Changes in market  interest  rates would also impact the estimated fair value of
our  portfolio of mortgage  revenue  bonds.  We estimate the fair value for each
mortgage  revenue bond as the present  value of its expected  future cash flows,
using a discount  rate for  comparable  tax-exempt  investments.  Therefore,  as
market interest rates for tax-exempt  investments  increase,  the estimated fair
value of our mortgage  revenue bonds will  generally  decline,  and a decline in
interest  rates would be  expected  to result in an increase in their  estimated
fair values.  For example,  we estimate that, using the same methodology used to
estimate  the  portfolio  fair value under SFAS No. 115, a 1% increase in market
rates for  tax-exempt  investments  would reduce the estimated fair value of our
portfolio of mortgage  revenue bonds by  approximately  $162.3  million and a 1%
decrease would result in an increase of approximately $182.1 million. Changes in
the  estimated  fair  value of the  mortgage  revenue  bonds do not  impact  our
reported net income, net income per share,  distributions or cash flows, but are
reported as  components of  accumulated  other  comprehensive  income and affect
reported  shareholders'  equity, and may affect our borrowing  capability to the
extent that collateral requirements are sometimes based on our asset values.    

56

10-K
57th Page of 151
TOC
1st
Previous
Next
Bottom
Just 57th

 MANAGEMENT'S REPORT ON THE EFFECTIVENESS OF
 INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of CharterMac and subsidiaries (the "Company") is responsible for
establishing and maintaining adequate internal control over financial reporting.
Our internal control system was designed to provide reasonable  assurance to our
management and Board of Trustees regarding the preparation and fair presentation
of published financial statements.                                              

All  internal  control  systems,  no matter  how well  designed,  have  inherent
limitations.  Therefore,  even those  systems  determined  to be  effective  can
provide  only   reasonable   assurance  with  respect  to  financial   statement
preparation and presentation.                                                   

CharterMac  management  assessed the  effectiveness  of the  Company's  internal
control  over  financial  reporting  as of  December  31,  2006.  In making this
assessment,  management  used  the  criteria  set  forth  by  the  Committee  of
Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control
-  Integrated  Framework.  Based  upon our  assessment  we believe  that,  as of
December 31, 2006, our internal control over financial reporting is effective in
accordance  with those  criteria.  Management  excluded from its  assessment the
internal  controls over financial  reporting at ARCap Investors,  LLC, which was
acquired  on August 15,  2006,  and whose  financial  statements  constitute  19
percent  and 18 percent  of net and total  assets,  respectively,  14 percent of
revenues and 10 percent of net income of the  consolidated  financial  statement
amounts as of and for the year ended December 31, 2006.                         

Deloitte & Touche LLP, our independent auditors,  have issued an audit report on
our assessment of the Company's internal control over financial reporting, which
appears on page 58.                                                             

/s/ Marc D. Schnitzer                                    /s/ Robert L. Levy     
---------------------                                    ------------------     
Marc D. Schnitzer                                        Robert L. Levy         
Chief Executive Officer                                  Chief Financial Officer
March 9, 2007                                            March 9, 2007          

57

10-K
58th Page of 151
TOC
1st
Previous
Next
Bottom
Just 58th

 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Trustees                                                        
and Shareholders of                                                             
CharterMac                                                                      
New York, New York                                                              

We  have  audited   management's   assessment,   included  in  the  accompanying
"Management's  Report on the  Effectiveness of Internal  Controls over Financial
Reporting",   that  CharterMac  and  subsidiaries  (the  "Company")   maintained
effective  internal  control over  financial  reporting as of December 31, 2006,
based on the  criteria  established  in INTERNAL  CONTROL--INTEGRATED  FRAMEWORK
issued by the Committee of Sponsoring  Organizations of the Treadway Commission.
As described in  "Management's  Report on the  Effectiveness of Internal Control
Over Financial Reporting",  management excluded from its assessment the internal
control over financial reporting at ARCap Investors, LLC and subsidiaries, which
was acquired on August 15, 2006 and whose  financial  statements  constitute  19
percent  and 18 percent  of net and total  assets,  respectively,  14 percent of
revenues,  and 10 percent of net income of the consolidated  financial statement
amounts as of and for the year ended December 31, 2006.  Accordingly,  our audit
did  not  include  the  internal  control  over  financial  reporting  at  ARCap
Investors,  LLC and  subsidiaries.  The Company's  management is responsible for
maintaining  effective  internal  control over  financial  reporting and for its
assessment of the  effectiveness of internal  control over financial  reporting.
Our  responsibility  is to express an opinion on management's  assessment and an
opinion on the  effectiveness  of the Company's  internal control over financial
reporting based on our audit.                                                   

We conducted  our audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain  reasonable  assurance  about whether  effective
internal  control  over  financial  reporting  was  maintained  in all  material
respects. Our audit included obtaining an understanding of internal control over
financial reporting,  evaluating management's assessment, testing and evaluating
the design and operating  effectiveness of internal control, and performing such
other  procedures as we considered  necessary in the  circumstances.  We believe
that our audit provides a reasonable basis for our opinions.                    

A company's internal control over financial  reporting is a process designed by,
or under the  supervision  of, the company's  principal  executive and principal
financial officers, or persons performing similar functions, and effected by the
company's  board of  directors,  management,  and  other  personnel  to  provide
reasonable  assurance  regarding the reliability of financial  reporting and the
preparation  of financial  statements for external  purposes in accordance  with
generally  accepted  accounting  principles.  A company's  internal control over
financial  reporting  includes those policies and procedures that (1) pertain to
the  maintenance  of records that, in reasonable  detail,  accurately and fairly
reflect the  transactions  and  dispositions  of the assets of the company;  (2)
provide  reasonable  assurance  that  transactions  are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting  principles,  and that receipts and  expenditures  of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of  unauthorized  acquisition,  use, or  disposition  of the company's
assets that could have a material effect on the financial statements.           

Because  of  the  inherent   limitations  of  internal  control  over  financial
reporting,  including  the  possibility  of  collusion  or  improper  management
override of controls,  material  misstatements  due to error or fraud may not be
prevented or detected on a timely basis. Also,  projections of any evaluation of
the  effectiveness  of the internal  control over financial  reporting to future
periods are subject to the risk that the controls may become inadequate  because
of changes in conditions,  or that the degree of compliance with the policies or
procedures may deteriorate.                                                     

In our opinion,  management's  assessment that the Company maintained  effective
internal  control over  financial  reporting as of December 31, 2006,  is fairly
stated, in all material respects,  based on the criteria established in INTERNAL
CONTROL--INTEGRATED   FRAMEWORK   issued   by  the   Committee   of   Sponsoring
Organizations  of the  Treadway  Commission.  Also in our  opinion,  the Company
maintained, in all material respects,  effective internal control over financial
reporting as of December 31, 2006, based on the criteria established in INTERNAL
CONTROL--INTEGRATED   FRAMEWORK   issued   by  the   Committee   of   Sponsoring
Organizations of the Treadway Commission.                                       

58

10-K
59th Page of 151
TOC
1st
Previous
Next
Bottom
Just 59th

We have also  audited,  in accordance  with the standards of the Public  Company
Accounting   Oversight  Board  (United  States),   the  consolidated   financial
statements  and  financial  statement  schedules  as of and for the  year  ended
December 31, 2006 of the Company and our report dated March 9, 2007 expressed an
unqualified  opinion on those  consolidated  financial  statements and financial
statement schedules.                                                            

/s/ DELOITTE & TOUCHE LLP                                                       
New York, New York                                                              
March 9, 2007                                                                   

59

10-K
60th Page of 151
TOC
1st
Previous
Next
Bottom
Just 60th

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.                           

                                                                [Download Table]


                                                                               Page
                                                                               ----
                                                                                   
(a) 1. Financial Statements                                                        
       --------------------                                                        

       Report of Independent Registered Public Accounting Firm                  61 

       Consolidated Balance Sheets as of December 31, 2006 and 2005             62 

       Consolidated Statements of Income for the years ended December 31,          
         2006, 2005 and 2004                                                    63 

       Consolidated Statements of Shareholders' Equity for the                     
         years ended December 31, 2006, 2005 and 2004                           64 

       Consolidated Statements of Cash Flows for the years ended December 31,      
         2006, 2005 and 2004                                                    67 

       Notes to Consolidated Financial Statements                               69 


60

10-K
61st Page of 151
TOC
1st
Previous
Next
Bottom
Just 61st

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                         

To the Board of Trustees                                                        
and Shareholders of                                                             
CharterMac                                                                      
New York, New York                                                              

We have audited the accompanying  consolidated  balance sheets of CharterMac and
subsidiaries  (the  "Company") as of December 31, 2006 and 2005, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three  years in the period  ended  December  31,  2006.  Our audits  also
included the financial  statement  schedules listed in the Index at Item 15(a)2.
These   financial   statements  and  financial   statement   schedules  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on the financial  statements and financial  statement schedules based on
our audits.                                                                     

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.                                               

In our opinion,  such consolidated  financial  statements present fairly, in all
material  respects,  the financial position of CharterMac and subsidiaries as of
December 31, 2006 and 2005,  and the results of their  operations and their cash
flows for each of the three years in the period  ended  December  31,  2006,  in
conformity with accounting principles generally accepted in the United States of
America.  Also,  in  our  opinion,  such  financial  statement  schedules,  when
considered in relation to the basic consolidated financial statements taken as a
whole,  present  fairly,  in all material  respects,  the  information set forth
therein.                                                                        

We have also  audited,  in accordance  with the standards of the Public  Company
Accounting  Oversight Board (United States),  the effectiveness of the Company's
internal control over financial  reporting as of December 31, 2006, based on the
criteria  established in INTERNAL  CONTROL--INTEGRATED  FRAMEWORK  issued by the
Committee of Sponsoring  Organizations of the Treadway Commission and our report
dated March 9, 2007 expressed an unqualified opinion on management's  assessment
of the effectiveness of the Company's internal control over financial  reporting
and an  unqualified  opinion  on the  effectiveness  of the  Company's  internal
control over financial reporting.                                               

/s/DELOITTE & TOUCHE LLP                                                        
New York, New York                                                              
March 9, 2007                                                                   

61

10-K
62nd Page of 151
TOC
1st
Previous
Next
Bottom
Just 62nd

 CHARTERMAC AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS
(In thousands)

                                                        [Enlarge/Download Table]


                                                                                December 31,       
                                                                        -------------------------- 
                                                                            2006           2005    
                                                                        -----------    ----------- 

                                     ASSETS                                                        

                                                                                                   
Cash and cash equivalents                                               $   178,907    $   161,295 
Restricted cash                                                              14,843         34,025 
Mortgage revenue bonds-at fair value (Note 3)                             2,397,738      2,294,787 
Other investments (Note 4)                                                  338,920        298,590 
Goodwill and intangible assets, net (Note 5)                                542,277        439,175 
Deferred costs and other assets, net (Note 6)                               196,145        135,509 
Loan to affiliate (Note 18)                                                  15,000             -- 
Investments held by consolidated partnerships (Note 7)                    4,965,907      3,025,762 
Other assets of consolidated partnerships (Note 7)                        1,038,779        579,614 
                                                                        -----------    ----------- 

Total assets                                                            $ 9,688,516    $ 6,968,757 
                                                                        ===========    =========== 

                     LIABILITIES AND SHAREHOLDERS' EQUITY                                          

Liabilities:                                                                                       
  Financing arrangements (Note 8)                                       $ 1,801,170    $ 1,429,692 
  Notes payable (Note 9)                                                    591,165        304,888 
  Preferred shares of subsidiary (subject to mandatory repurchase)                                 
    (Note 13)                                                               273,500        273,500 
  Accounts payable, accrued expenses and other liabilities (Note 10)        214,344        178,365 
  Notes payable and other liabilities of consolidated partnerships                                 
    (Note 7)                                                              2,700,154      1,618,395 
                                                                        -----------    ----------- 

Total liabilities                                                         5,580,333      3,804,840 
                                                                        -----------    ----------- 

Minority interests in consolidated subsidiaries (Note 13)                   247,390        262,274 
                                                                        -----------    ----------- 
Preferred shares of subsidiary (not subject to mandatory repurchase)                               
   (Note 13)                                                                104,000        104,000 
                                                                        -----------    ----------- 
Limited partners' interests in consolidated partnerships                  2,806,661      1,747,808 
                                                                        -----------    ----------- 

Commitments and contingencies (Note 21)                                                            

Shareholders' equity (Note 14):                                                                    
 Beneficial owners equity:                                                                         
 4.4% Convertible CRA preferred shares; no par value; 2,160 shares                                 
    issued and outstanding in 2006 and 2005                                 104,498        104,498 
 Convertible CRA shares; no par value; 6,552 shares issued and                                     
    outstanding in 2006 and 2005                                             97,499        104,369 
 Special preferred voting shares; no par value (14,825 shares issued                               
    and outstanding in 2006 and 14,885 shares issued and outstanding                               
    in 2005)                                                                    148            150 
 Common shares; no par value (160,000 shares authorized; 52,746 issued                             
    and 51,343 outstanding in 2006 and 52,309 issued and 51,988                                    
    outstanding in 2005)                                                    709,142        752,042 
 Restricted shares granted                                                       --         (4,193)
 Treasury shares of beneficial interest - common, at cost (1,403                                   
    shares in 2006 and 321 shares in 2005)                                  (28,018)        (7,135)
 Accumulated other comprehensive income                                      66,863        100,104 
                                                                        -----------    ----------- 
Total shareholders' equity                                                  950,132      1,049,835 
                                                                        -----------    ----------- 

Total liabilities and shareholders' equity                              $ 9,688,516    $ 6,968,757 
                                                                        ===========    =========== 


 See accompanying notes to consolidated financial statements

62

10-K
63rd Page of 151
TOC
1st
Previous
Next
Bottom
Just 63rd

 CHARTERMAC AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF INCOME
 (in thousands except per share amounts)

                                                        [Enlarge/Download Table]


                                                                        Year Ended December 31,       
                                                                  ----------------------------------- 
                                                                     2006         2005         2004   
                                                                  ---------    ---------    --------- 
                                                                                                      
Revenues:                                                                                             
   Mortgage revenue bond interest income                          $ 156,500    $ 146,024    $ 132,075 
   Other interest income                                             34,159       16,162        9,346 
   Fee income                                                        84,201       84,780       69,066 
   Other revenues                                                    28,661       24,035        9,732 
   Revenues of consolidated partnerships (Note 7)                    83,738       24,096       12,213 
                                                                  ---------    ---------    --------- 
     Total revenues                                                 387,259      295,097      232,432 
                                                                  ---------    ---------    --------- 

Expenses:                                                                                             
   Interest expense                                                  97,055       56,698       30,932 
   Interest expense of consolidated partnerships                     47,926       26,322       21,395 
   Interest expense - distributions to preferred shareholders                                         
     of subsidiary                                                   18,898       18,898       18,898 
   General and administrative (Note 16)                             165,648      128,613      101,306 
   Depreciation and amortization                                     47,527       44,195       30,407 
    Write-off of goodwill and intangible assets                       2,644       22,567           -- 
   Loss on impairment of mortgage revenue bonds and other assets      5,003        4,555          757 
   Expenses of consolidated partnerships (Note 7)                    75,946       49,810       30,519 
                                                                  ---------    ---------    --------- 
     Total expenses                                                 460,647      351,658      234,214 
                                                                  ---------    ---------    --------- 

Loss before other income                                            (73,388)     (56,561)      (1,782)

Equity and other income                                               1,978        7,037        3,442 
Gain on sale or repayment of mortgage revenue bonds and                                               
  other assets                                                       18,370        8,062        7,868 
Loss on investments held by consolidated partnerships              (278,232)    (247,986)    (149,048)
                                                                  ---------    ---------    --------- 

Loss before allocations and income taxes                           (331,272)    (289,448)    (139,520)

Income  allocated to preferred shareholders of subsidiary            (6,225)      (6,225)      (3,942)
Minority interests in consolidated subsidiaries, net of tax                                           
  (Note 13)                                                         (16,094)     (23,421)     (28,368)
Loss allocated to partners of consolidated partnerships             401,377      349,531      219,950 
                                                                  ---------    ---------    --------- 

Income before income taxes                                           47,786       30,437       48,120 
Income tax (provision) benefit (Note 12)                             (6,492)      28,577       17,243 
                                                                  ---------    ---------    --------- 

Net income                                                        $  41,294    $  59,014    $  65,363 
                                                                  =========    =========    ========= 

Allocation of net income to:                                                                          
   4.4% Convertible CRA preferred shareholders                    $   4,752    $   2,020    $      -- 
   Common shareholders                                               32,405       50,558       56,786 
   Convertible CRA shareholders                                       4,137        6,436        8,577 
                                                                  ---------    ---------    --------- 
     Total                                                        $  41,294    $  59,014    $  65,363 
                                                                  =========    =========    ========= 

Net income per share (Note 17):                                                                       
   Basic                                                          $    0.63    $    0.98    $    1.19 
                                                                  =========    =========    ========= 
   Diluted                                                        $    0.62    $    0.98    $    1.19 
                                                                  =========    =========    ========= 

Weighted average shares outstanding (Note 17):                                                        
   Basic                                                             58,154       58,018       54,786 
                                                                  =========    =========    ========= 
   Diluted                                                           58,711       58,291       55,147 
                                                                  =========    =========    ========= 

Dividends declared per share                                      $    1.68    $    1.65    $    1.57 
                                                                  =========    =========    ========= 


 See accompanying notes to consolidated financial statements

63

10-K
64th Page of 151
TOC
1st
Previous
Next
Bottom
Just 64th

 CHARTERMAC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In thousands)

                                                        [Enlarge/Download Table]


                                                                        Beneficial Owners Equity                            
                                                       ---------------------------------------------------------            
                                                            4.4%                                                            
                                                        Convertible                       Special                  Treasury 
                                                       CRA Preferred   Convertible       Preferred       Common    Shares - 
                                                           Shares       CRA Shares     Voting Shares     Shares     Common  
                                                       -------------   ------------    -------------    --------   ---------
                                                                                                                            
Balance at January 1, 2004                               $     --        $138,748        $    161       $644,641   $   (378)

Comprehensive income:                                                                                                       

Net income                                                                  8,577                         56,786            

Other comprehensive loss:                                                                                                   
  Net unrealized loss on derivatives                                                                                        
  Unrealized holding loss on mortgage revenue bonds                                                                         
  Less: reclassification to net income                                                                                      

  Other comprehensive loss                                                                                                  

  Comprehensive income                                                                                                      

Options exercised and other share based compensation,                                                                       
  net of forfeitures                                                                                        (564)           
Amortization of share awards                                                                                                
Conversion of Special Common Units and redemption of                                                                        
  Special Preferred Voting Shares                                                              (9)        17,789            
Conversion of Convertible CRA shares                                      (27,585)                        27,585            
Issuance costs of Convertible CRA shares                                     (148)                                          
Issuance of common shares                                                                                105,541            
Repurchase of treasury shares                                                                                        (2,592)
Distributions                                                             (10,847)                       (78,613)           
                                                       -------------   ------------    -------------    --------   ---------

Balance at December 31, 2004                             $     --        $108,745        $    152       $773,165   $ (2,970)
                                                       -------------   ------------    -------------    --------   ---------



                                                                                       Accumulated                          
                                                       Restricted                         Other                             
                                                         Shares      Comprehensive    Comprehensive                         
                                                         Granted         Income           Income         Total              
                                                       ----------    -------------    -------------    ---------            
                                                                                                                            
Balance at January 1, 2004                             $(19,385)                        $ 28,436       $792,223             

Comprehensive income:                                                                                                       

Net income                                                             $ 65,363                          65,363             
                                                                     -------------                                          
Other comprehensive loss:                                                                                                   
  Net unrealized loss on derivatives                                     (1,078)                                            
  Unrealized holding loss on mortgage revenue bonds                     (16,023)                                            
  Less: reclassification to net income                                      217                                             
                                                                     -------------                                          
  Other comprehensive loss                                              (16,884)         (16,884)       (16,884)            
                                                                     -------------                                          

  Comprehensive income                                                 $ 48,479                                             
                                                                     -------------                                          

Options exercised and other share based compensation,                                                                       
  net of forfeitures                                       (169)                                           (733)            
Amortization of share awards                             11,632                                          11,632             
Conversion of Special Common Units and redemption of                                                                        
  Special Preferred Voting Shares                                                                        17,780             
Conversion of Convertible CRA shares                                                                         --             
Issuance costs of Convertible CRA shares                                                                   (148)            
Issuance of common shares                                                                               105,541             
Repurchase of treasury shares                                                                            (2,592)            
Distributions                                                                                           (89,460)            
                                                       ----------                     -------------    ---------            

Balance at December 31, 2004                           $ (7,922)                        $ 11,552       $882,722             
                                                       ----------                     -------------    ---------            

                                                                                                      (continued)           


 See accompanying notes to consolidated financial statements

64

10-K
65th Page of 151
TOC
1st
Previous
Next
Bottom
Just 65th

 CHARTERMAC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In thousands)
 (continued)

                                                        [Enlarge/Download Table]


                                                                        Beneficial Owners Equity                             
                                                       ---------------------------------------------------------             
                                                            4.4%                                                             
                                                        Convertible                       Special                   Treasury 
                                                       CRA Preferred   Convertible       Preferred       Common     Shares - 
                                                           Shares       CRA Shares     Voting Shares     Shares      Common  
                                                       -------------   ------------    -------------    --------    ---------
                                                                                                                             
Balance at December 31, 2004                             $     --        $108,745        $    152       $773,165    $ (2,970)

Comprehensive income:                                                                                                        
Net income                                                  2,020           6,436                         50,558             

Other comprehensive income:                                                                                                  
  Net unrealized gain on derivatives                                                                                         
  Unrealized gain on marketable securities                                                                                   
  Unrealized holding gain on mortgage revenue bonds                                                                          
  Less: reclassification to net income                                                                                       

  Other comprehensive income                                                                                                 

  Comprehensive income                                                                                                       

Options exercised and other share based compensation,                                                                        
  net of forfeitures                                                                                       8,325             
Amortization of share awards                                                                                 895             
Conversion of Special Common Units and redemption of                                                                         
  Special Preferred Voting Shares                                                              (2)         4,818             
Issuance of 4.4% Convertible CRA Preferred shares         104,498                                                            
Repurchase of treasury shares                                                                                         (4,165)
Distributions                                              (2,020)        (10,812)                       (85,719)            
                                                       -------------   ------------    -------------    --------    ---------

Balance at December 31, 2005                             $104,498        $104,369        $    150       $752,042    $ (7,135)
                                                       -------------   ------------    -------------    --------    ---------



                                                                                       Accumulated                           
                                                       Restricted                         Other                              
                                                         Shares      Comprehensive    Comprehensive                          
                                                         Granted         Income           Income         Total               
                                                       ----------    -------------    -------------    ----------            
                                                                                                                             
Balance at December 31, 2004                           $ (7,922)                        $ 11,552       $  882,722            

Comprehensive income:                                                                                                        
Net income                                                             $ 59,014                            59,014            
                                                                     -------------                                           
Other comprehensive income:                                                                                                  
  Net unrealized gain on derivatives                                      5,848                                              
  Unrealized gain on marketable securities                                   35                                              
  Unrealized holding gain on mortgage revenue bonds                      84,230                                              
  Less: reclassification to net income                                   (1,561)                                             
                                                                     -------------                                           
  Other comprehensive income                                             88,552           88,552           88,552            
                                                                     -------------                                           
  Comprehensive income                                                 $147,566                                              
                                                                     -------------                                           

Options exercised and other share based compensation,                                                                        
  net of forfeitures                                     (2,936)                                            5,389            
Amortization of share awards                              6,665                                             7,560            
Conversion of Special Common Units and redemption of                                                                         
  Special Preferred Voting Shares                                                                           4,816            
Issuance of 4.4% Convertible CRA Preferred shares                                                         104,498            
Repurchase of treasury shares                                                                              (4,165)           
Distributions                                                                                             (98,551)           
                                                       ----------                     -------------    ----------            

Balance at December 31, 2005                           $ (4,193)                        $100,104       $1,049,835            
                                                       ----------                     -------------    ----------            

                                                                                                       (continued)           


 See accompanying notes to consolidated financial statements

65

10-K
66th Page of 151
TOC
1st
Previous
Next
Bottom
Just 66th

 CHARTERMAC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In thousands)
 (continued)

                                                        [Enlarge/Download Table]


                                                                         Beneficial Owners Equity                             
                                                        ---------------------------------------------------------             
                                                             4.4%                                                             
                                                         Convertible                       Special                   Treasury 
                                                        CRA Preferred   Convertible       Preferred       Common     Shares - 
                                                            Shares       CRA Shares     Voting Shares     Shares      Common  
                                                        -------------   ------------    -------------    --------    ---------
                                                                                                                              
Balance at December 31, 2005                              $104,498        $104,369        $    150       $752,042    $ (7,135)

Comprehensive income:                                                                                                         
Net income                                                   4,752           4,137                         32,405             

Other comprehensive loss:                                                                                                     
  Net unrealized loss on derivatives                                                                                          
  Unrealized gain on marketable securities                                                                                    
  Unrealized holding loss on mortgage revenue bonds                                                                           
    and other assets                                                                                                          
  Less: reclassification to net income                                                                                        

  Other comprehensive loss                                                                                                    

  Comprehensive income                                                                                                        

Reclassification of unamortized restricted shares                                                                             
  upon adoption of FAS 123(R)                                                                              (4,193)            
Options exercised and other share based                                                                                       
  compensation, net of forfeitures                                                                            743             
Amortization of share awards                                                                               15,105             
Conversion of Special Common Units and                                                                                        
  redemption of Special Preferred Voting Shares                                                 (2)         1,954             
Repurchase of treasury shares                                                                                         (20,883)
Distributions                                               (4,752)        (11,007)                       (88,914)            
                                                        -------------   ------------    -------------    --------    ---------
Balance at December 31, 2006                              $104,498        $ 97,499        $    148       $709,142    $(28,018)
                                                        =============   ============    =============    ========    =========



                                                                                        Accumulated                           
                                                        Restricted                         Other                              
                                                          Shares      Comprehensive    Comprehensive                          
                                                          Granted         Income           Income         Total               
                                                        ----------    -------------    -------------    ----------            
                                                                                                                              
Balance at December 31, 2005                            $ (4,193)                        $100,104       $1,049,835            

Comprehensive income:                                                                                                         
Net income                                                              $ 41,294                            41,294            
                                                                      -------------                                           
Other comprehensive loss:                                                                                                     
  Net unrealized loss on derivatives                                      (2,267)                                             
  Unrealized gain on marketable securities                                 1,561                                              
  Unrealized holding loss on mortgage revenue bonds                                                                           
    and other assets                                                     (31,991)                                             
  Less: reclassification to net income                                      (544)                                             
                                                                      -------------                                           
  Other comprehensive loss                                               (33,241)         (33,241)         (33,241)           
                                                                      -------------                                           
  Comprehensive income                                                  $  8,053                                              
                                                                      -------------                                           

Reclassification of unamortized restricted shares upon                                                                        
  adoption of FAS 123(R)                                   4,193                                                              
Options exercised and other share based                                                                                       
  compensation, net of forfeitures                                                                             743            
Amortization of share awards                                                                                15,105            
Conversion of Special Common Units and                                                                                        
  redemption of Special Preferred Voting Shares                                                              1,952            
Repurchase of treasury shares                                                                              (20,883)           
Distributions                                                                                             (104,673)           
                                                        ----------                     -------------    ----------            
Balance at December 31, 2006                            $     --                         $ 66,863       $  950,132            
                                                        ==========                     =============    ==========            


 See accompanying notes to consolidated financial statements

66

10-K
67th Page of 151
TOC
1st
Previous
Next
Bottom
Just 67th

 CHARTERMAC AND SUBSIDIARIES

 CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

                                                        [Enlarge/Download Table]


                                                                     Year Ended December 31,      
                                                              ----------------------------------- 
                                                                 2006         2005         2004   
                                                              ---------    ---------    --------- 
                                                                                                  
CASH FLOWS FROM OPERATING ACTIVITIES:                                                             
   Net income                                                 $  41,294    $  59,014    $  65,363 
   Adjustments to reconcile net income to net cash provided                                       
    by operating activities:                                                                      
   Gain on sale or repayment of mortgage revenue bonds                                            
    and other assets                                             (1,055)      (1,561)        (217)
   Loss on impairment of mortgage revenue bonds and other                                         
    assets                                                        5,003        4,555          757 
   Depreciation and amortization                                 47,527       44,195       30,407 
   Equity in income of unconsolidated entities                   (1,979)      (7,037)      (3,442)
   Write-off of goodwill and intangible assets                    2,644       22,567           -- 
   Gain on CUC contract                                            (916)          --           -- 
   Income allocated to preferred shareholders of subsidiary       6,225        6,225        3,942 
   Income allocated to minority interests in consolidated                                         
    subsidiaries                                                 16,087       23,421       28,368 
   Non-cash compensation expense                                 18,467        8,924       11,632 
   Other non-cash (income) expense                                 (531)       2,737        3,303 
   Deferred taxes                                                 2,156      (28,178)     (20,545)
   Distributions received from equity investees                   4,469        3,702        2,219 
   Reserves for bad debt                                         25,898       24,238       13,631 
   Changes in operating assets and liabilities:                                                   
    Mortgage servicing rights                                    (8,648)      (7,520)      (6,854)
    Mortgage loans receivable                                    31,288     (125,797)      (5,610)
    Loan to affiliate                                           (15,000)       4,600       (4,600)
    Deferred revenues                                            24,167       10,210       35,122 
    Restructuring costs payable                                   1,128           --           -- 
    Receivables                                                 (88,742)     (65,172)          -- 
    Other assets                                                (23,417)        (337)     (46,259)
    Accounts payable, accrued expenses and other liabilities        651       21,899         (812)
                                                              ---------    ---------    --------- 

Net cash provided by operating activities                        86,716          685      106,405 
                                                              ---------    ---------    --------- 

CASH FLOWS FROM INVESTING ACTIVITIES:                                                             
   Repayments of  mortgage revenue bonds                        115,600      133,611       39,067 
   Mortgage revenue bond acquisitions and fundings             (419,940)    (443,517)    (325,037)
   Investments in notes receivable                               (6,594)     (34,401)      (3,900)
   Repayments of notes receivable                                48,930        3,039        1,958 
   Acquisitions, net of cash acquired                          (262,659)        (290)      (1,579)
   Loans to Capri Capital                                            --       (8,011)     (84,000)
   Advances to partnerships                                    (195,044)    (146,977)    (173,526)
   Collection of advances to partnerships                       188,711      138,981      156,875 
   Deferred investment acquisition costs                         (1,478)      (2,579)      (1,342)
   Decrease in cash and cash equivalents - restricted            19,338          317        6,781 
   Return of capital from equity investees                       16,667           --           -- 
   Purchases of marketable securities                              (109)          --           -- 
   Other investing activities                                   (27,318)     (13,191)      18,056 
                                                              ---------    ---------    --------- 

Net cash used in investing activities                          (523,896)    (373,018)    (366,647)
                                                              ---------    ---------    --------- 


 See accompanying notes to consolidated financial statements

 continued

67

10-K
68th Page of 151
TOC
1st
Previous
Next
Bottom
Just 68th

 CHARTERMAC AND SUBSIDIARIES

 CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 (continued)

                                                        [Enlarge/Download Table]


                                                                                    Year Ended December 31,          
                                                                           ----------------------------------------- 
                                                                              2006           2005           2004     
                                                                           -----------    -----------    ----------- 
                                                                                                                     
CASH FLOWS FROM FINANCING ACTIVITIES:                                                                                
   Distributions to shareholders                                              (104,168)       (96,556)       (84,395)
   Distributions to preferred shareholders of subsidiary                        (6,225)        (6,225)        (2,386)
   Distributions to Special Common Unit, Special Membership                                                          
    Unit and Special Common Interest holders                                   (35,589)       (34,677)       (28,411)
   Proceeds from financing arrangements                                      1,409,098        546,632        281,060 
   Repayments of financing arrangements                                     (1,028,533)      (185,369)      (112,639)
   Increase in notes payable                                                   244,679        130,434         21,105 
   Minority interest contribution                                                5,250             --             -- 
   Proceeds from stock options exercised                                           756          3,804            308 
   Retirement of Special Common Units and special preferred voting shares         (724)            (2)           (10)
   Treasury stock purchases                                                    (20,447)            --             -- 
   Issuance of preferred shares                                                     --        108,000             -- 
   Issuance of common or Convertible CRA shares                                     --             --        110,803 
   Issuance of preferred subsidiary shares                                          --             --        104,000 
   Deferred financing costs                                                     (9,305)        (3,700)       (10,140)
                                                                           -----------    -----------    ----------- 

Net cash provided by financing activities                                      454,792        462,341        279,295 
                                                                           -----------    -----------    ----------- 

Net increase in cash and cash equivalents                                       17,612         90,008         19,053 
Cash and cash equivalents at the beginning of the year                         161,295         71,287         52,234 
                                                                           -----------    -----------    ----------- 

Cash and cash equivalents at the end of the year                           $   178,907    $   161,295    $    71,287 
                                                                           -----------    -----------    ----------- 

SUPPLEMENTAL INFORMATION:                                                                                            

   Interest paid                                                           $    94,713    $    55,771    $    31,057 
   Taxes paid                                                              $     1,204    $       768    $     8,040 

Acquisition activity:                                                                                                

   Conversion of existing assets                                           $    14,221    $    70,000                
   Issuance of subsidiary equity                                                 4,859          7,500                
   Decrease in minority interest                                                    --         (4,200)   $    (1,579)
   Assets acquired                                                            (341,248)       (90,530)               
   Liabilities assumed                                                          59,509         16,940                
                                                                           -----------    -----------    ----------- 
Net cash paid for acquisitions                                             $  (262,659)   $      (290)   $    (1,579)
                                                                           ===========    ===========    =========== 

Non-cash activities relating to adoption of FIN 46(R):                                                               
    Decrease in mortgage revenue bonds                                                                   $    33,821 
    Increase in other assets                                                                                   4,731 
    Increase in investments held by consolidated partnerships                                             (2,173,621)
    Increase in other assets of consolidated partnerships                                                   (210,494)
    Increase in notes payable and other liabilities of                                                               
      consolidated partnerships                                                                            1,047,976 
    Increase in partners' interests of consolidated partnerships                                           1,297,587 
                                                                                                         ----------- 
                                                                                                         $        -- 
                                                                                                         =========== 

Non-cash investing and financing activities:                                                                         
        Share grants and SCUs issued                                       $    41,767    $     3,706    $     1,875 
        Issuance of SMUs in exchange for investment or acquisition         $        --    $    11,576    $        -- 
        Conversion of SCUs to common shares                                $     1,954    $     4,818    $    17,789 

        Conversion of CRA shares to common shares                          $        --    $        --    $    27,585 
        Treasury stock purchases via employee withholding                  $       436    $     4,165    $     2,592 
        Cancellation of acquisition - related SMUs                         $    (4,076)   $        --    $        -- 


 See accompanying notes to consolidated financial statements

68

10-K
69th Page of 151
TOC
1st
Previous
Next
Bottom
Just 69th

 CHARTERMAC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF  SIGNIFICANT ACCOUNTING POLICIES                            

A. CONSOLIDATION AND BASIS OF PRESENTATION                                      

The consolidated  financial  statements include the accounts of CharterMac,  our
wholly owned and majority owned subsidiary  statutory  trusts,  corporations and
limited liability companies which it controls and entities consolidated pursuant
to  the  adoption  of  FASB  Interpretation  No.  46(R)  or  similar  accounting
pronouncements  (see 1.O.  CONSOLIDATED  PARTNERSHIPS  below).  All intercompany
accounts  and  transactions  have  been  eliminated  in  consolidation.   Unless
otherwise indicated,  the Company, "we", "our" and "us", as used throughout this
document, refers to CharterMac and our consolidated subsidiaries.               

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

B. REVENUE RECOGNITION                                                          

We derive our revenues from a variety of investments and services, summarized as
follows:                                                                        

o    MORTGAGE REVENUE BOND INTEREST INCOME                            

          We recognize income as it accrues,  provided  collectability of future
          amounts is reasonably assured.  We recognize  contingent interest when
          received.  For bonds with modified  terms, or when  collectability  is
          uncertain, we recognize revenue based upon expected cash receipts. For
          bonds which carry a different  interest  rate during the  construction
          period than during the balance of the term, we calculate the effective
          yield on the bond and use that rate to recognize  income over the life
          of the bond.  Acquisition  fees received upon  acquisition of mortgage
          revenue bonds are deferred and amortized through the call dates of the
bonds.                                                      

          We place  loans  on a  non-accrual  status  when  any  portion  of the
          principal  or  interest  is 90 days past due or earlier  when  concern
          exists as to the  ultimate  collectability  of  principal or interest.
          Loans return to accrual  status when  principal  and  interest  become
          current.  There were seven bonds with a fair value of $35.1 million on
          non-accrual  status at  December  31, 2006 and eight bonds with a fair
      value of $49.9 million on non-accrual status at December 31, 2005.

o    OTHER INTEREST INCOME                                            

          We recognize  income on temporary  investments  (such as cash in banks
          and short-term  instruments) as well as longer term investments  (from
          promissory notes,  mortgages receivable,  etc.) and escrow accounts we
manage, on the accrual basis as earned.                     

          We recognize  income on  resecuritization  certificates as it accrues,
          provided  collectability of future amounts is reasonably  assured.  We
          adjust the amortized  cost of securities for accretion of discounts to
          maturity.  We compute  accretion using the  effective-interest  method
          over  the  expected  life of the  securities  based  on our  estimates
          regarding  the timing  and  amount of cash  flows from the  underlying
collateral.                                                 

o    FEE INCOME                                                       

o    FUND SPONSORSHIP FEES                                  

               o    ORGANIZATION,  OFFERING AND  ACQUISITION  ALLOWANCE FEES are
                    for   reimbursement   of  costs  we  incur  for   organizing
                    Low-Income Housing Tax Credit ("LIHTC") investment funds and
                    for providing  assistance in acquiring the  properties to be
                    included in the funds.  We recognize  the  organization  and
                    offering  allowance  fee when the investor  equity is raised
                    and  recognize  the  acquisition   allowance  fee  when  the

69

10-K
70th Page of 151
TOC
1st
Previous
Next
Bottom
Just 70th

 CHARTERMAC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

                    investment  funds acquire  properties.  The related expenses
            are included in general and administrative expenses.

               o    PARTNERSHIP  MANAGEMENT  FEES are for  maintaining the books
                    and records of LIHTC investment funds,  including  requisite
                    investor  reporting.  We recognize  these fees over the five
                    year  contractual   service  period  following  the  initial
closing of the fund.                    

               o    PROPERTY ACQUISITION AND ACQUISITION  ALLOWANCE FEES are for
                    services   we   perform   in    acquiring    interests    in
                    property-owning  partnerships  which  comprise the assets of
                    LIHTC funds we  sponsor.  We  recognize  these fees when the
                    investor  equity is invested and as the  properties  limited
                 partnership interest are acquired by the investment fund.

o    ASSET MANAGEMENT FEES from:                  

                    o    LIHTC investment  funds,  based on a percentage of each
                         investment   fund's  invested  assets  are  earned  for
                         monitoring  the acquired  property  interests to ensure
                         that their  development,  leasing and operations comply
              with LIHTC or other tax credit requirements;

                    o    American  Mortgage  Acceptance  Company  ("AMAC"),   an
                         affiliated,  publicly  traded  real  estate  investment
                         trust we manage (see Note 18), based upon AMAC's equity
                         as  well  as  incentive   management  fees  if  certain
        profitability levels are attained; and

                    o    CharterMac  Urban  Capital LLC ("CUC"),  an  investment
                         fund in which we also have a membership  interest  (see
                         Note 4), based on a percentage  of the fund's  invested
assets.                       

                    Asset  management  fees  are  recorded  monthly  as  earned,
       provided that collection is reasonably assured.

o    MORTGAGE BANKING FEES                                  

               o    MORTGAGE ORIGINATION FEES for originating loans are recorded
              upon settlement of sale to the purchaser of the loans.

               o    MORTGAGE  SERVICING  FEES are recognized on an accrual basis
                as the services are performed over the servicing period.

o    CREDIT INTERMEDIATION FEES                             

               o    Fees  for  credit  intermediation  transactions  to  provide
                    specified  rates of return for an LIHTC  fund,  received  in
                    advance,  are deferred  and  amortized  over the  applicable
                    risk-weighted  periods on a straight-line  basis.  For those
                    pertaining to the  construction and lease-up phase of a pool
                    of properties, the periods are generally one to three years.
                    For those  pertaining to the operational  phase of a pool of
         properties, the period is approximately 20 years.

               o    Fees  for  other  credit  intermediation   transactions  are
              received monthly and recognized as income when earned.

o    OTHER REVENUES                                         

               o    PREPAYMENT PENALTIES from early payments of mortgage revenue
                    bonds or serviced  mortgage loans are recognized at the time
of prepayment.                          

               o    CONSTRUCTION  SERVICE  FEEs  from  borrowers  for  servicing
                    mortgage  revenue bonds during the  construction  period are
                    deferred and amortized  into other income over the estimated
construction period.                    

70

10-K
71st Page of 151
TOC
1st
Previous
Next
Bottom
Just 71st

 CHARTERMAC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

               o    ADMINISTRATION FEES charged to the property  partnerships or
                    to other entities we manage are recorded as the payments are
          received due to the uncertainty of collectability.

               o    EXPENSE  REIMBURSEMENTS include amounts billed to investment
                    funds and other affiliated  entities  ("affiliates") for the
                    reimbursement   of  salaries  and  certain   other   ongoing
                    operating  expenditures  incurred by  CharterMac  Capital on
                    behalf of these  affiliates.  We recognize  these amounts as
incurred.                               

o    REVENUES OF CONSOLIDATED PARTNERSHIPS                  

               Rental  income  for  property  partnerships  is accrued as earned
               based on underlying  lease  agreements.  Interest  income for all
               consolidated  partnerships  is accrued  as earned.  For our funds
               which invest in commercial  mortgage-backed  securities ("CMBS"),
               we recognize  interest income as earned.  We compute accretion of
               purchase discounts using the  effective-interest  method over the
               expected life of the securities based on our estimates  regarding
               the  timing  and  amount  of  cash  flows  from  the   underlying
collateral.                                       

C. INVESTMENT IN MORTGAGE REVENUE BONDS                                         

We account for our investments in mortgage  revenue bonds as  available-for-sale
debt  securities  under the  provisions of SFAS No. 115,  ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES ("SFAS No. 115"). This  classification
is due to a  provision  in most of the bonds  whereby we have a right to require
redemption  prior to maturity,  although we can and may elect to hold them up to
their maturity dates unless otherwise modified,  and the ability of the borrower
to prepay the bond after a lockout period.  Accordingly, we carry investments in
mortgage  revenue bonds at their  estimated fair values,  and report  unrealized
gains and losses in accumulated other comprehensive income.                     

Because mortgage revenue bonds have a limited market, we estimate fair value for
each  bond as the  present  value of its  expected  future  cash  flows  using a
discount rate for comparable tax-exempt investments.  This process is based upon
projections of future economic events affecting the real estate  collateralizing
the bonds,  such as property  occupancy  rates,  rental  rates,  operating  cost
inflation,  market  capitalization  rates  and an  appropriate  market  rate  of
interest.                                                                       

Direct  costs  relating to  unsuccessful  acquisitions  and all  indirect  costs
relating to the mortgage revenue bonds are charged to operations.               

We consider a mortgage revenue bond as impaired when we determine it is probable
that not all required  contractual payments will be made when due, from property
operations or other sources of collection  (such as sale under  foreclosure  and
syndication  of associated  tax credits)  would not cover any  shortfall.  If we
determine a bond is impaired,  we write it down to its estimated  fair value and
record a realized loss in the statement of income. Our primary tool to determine
which loans are likely to incur a loss is to evaluate the debt service  coverage
ratio  based  on our  historical  experience  with  similar  properties  and the
frequency of such losses.                                                       

When a mortgage revenue bond is  underperforming  with respect to certain of our
standards (for example,  expectations of timely construction completion,  actual
occupancy levels or actual debt service coverage) but we still expect to recover
all contractual  payments (either through debt service or collateral),  we value
it based on our estimate of the fair value as  described  above,  although  such
fair value will not exceed the outstanding face amount.                         

D. OTHER INVESTMENTS                                                            

Equity Method Investments                                             
-------------------------                                             

     o    We invest in partnership  interests  related to the real estate equity
          investment funds we sponsor.  Typically, we hold these investments for
a short period until we establish a new fund.               

     o    We account for  investments  in entities in which we have  significant
          influence  but do not control  (such as  CharterMac  Urban Capital LLC
          ("CUC") and our  pre-acquisition  investment in ARCap  Investors,  LLC
          ("ARCap") under the equity method of accounting.  We recognize  income

71

10-K
72nd Page of 151
TOC
1st
Previous
Next
Bottom
Just 72nd

 CHARTERMAC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

          based  on our  respective  ownership  percentages.  For the  preferred
          portion of the pre-acquisition ARCap investment, we accrued our equity
earnings at the applicable cumulative dividend rate.        

Available-for-Sale                                                    
------------------                                                    

     o    We hold investments in resecuritization  certificates,  and funds that
          we  consolidate  hold  CMBS  and  resecuritization   certificates.  We
          classify these investments as  available-for-sale  as we may sell them
          or  dispose  of them  prior  to  maturity.  As such,  we  carry  these
          investments  at their  estimated  fair values,  and report  unrealized
          gains  and  losses  in  accumulated  other  comprehensive  income.  We
          evaluate  any  unrealized  losses to determine if the declines in fair
          value are  other-than-temporary;  if so, we record the decline in fair
          value as an  impairment  to the security and record a realized loss in
          the statement of income.  We generally  estimate the fair value of the
          CMBS based on market  prices  provided  by certain  dealers who make a
market in these financial instruments.                      

          The  yield  to  maturity  on CMBS  and  resecuritization  certificates
          depends  on,  among  other  things,  the rate and timing of  principal
          payments,  the pass-through rate, and interest rate fluctuations.  Our
          subordinate CMBS interests and  resecuritization  certificates provide
          credit support to the more senior interests of the related  commercial
          securitization.  Cash  flow  from the  mortgages  underlying  the CMBS
          interests  and  resecuritization  certificates  generally is allocated
          first to the senior  interests and then among the other CMBS interests
          and resecuritization  certificates in order of relative seniority.  To
          the extent that there are  defaults  and  unrecoverable  losses on the
          underlying  mortgages  that  result in reduced  cash  flows,  the most
          subordinate CMBS interest and  resecuritization  certificate will bear
          this loss  first,  with  excess  losses  borne by the  remaining  CMBS
          interests  and  resecuritization  certificates  in order  of  relative
subordination.                                              

o    We value marketable securities based on quoted market prices.    

Other                                                                 
-----                                                                 

     o    Mortgage loans held for sale represent amounts we are due for mortgage
          loans that were sold under purchase agreements to permanent investors,
          but for which we are  awaiting  settlement  of funds,  and the balance
          includes net origination costs. We do not retain any interest in these
          loans  except for  mortgage  servicing  rights and certain  contingent
          liabilities  pursuant  to loss  sharing  agreements.  We  record  loan
          commitment  fees as deferred  revenue net of direct  costs  associated
          with  closing the related loan and  recognize  them as income when the
          loans  are  sold in  accordance  with  SFAS  No.  91,  ACCOUNTING  FOR
          NONREFUNDABLE  FEES AND COSTS ASSOCIATED WITH ORIGINATING OR ACQUIRING
LOAN AND INITIAL DIRECT COSTS OF LEASES.                    

     o    Notes  receivable are carried at their net realizable  value.  When we
          believe  that we will not  collect  all amounts due under the terms of
the loan, we record a valuation allowance.                  

     o    We  invest  in  affiliated   entities  that   co-develop   properties.
          Development    investments    include   amounts   invested   to   fund
          pre-development  and development  costs.  Investment  funds we sponsor
          acquire  the limited  partnership  interest  in these  properties.  We
          expect to recapture these amounts from various sources attributable to
          the properties,  including capital contributions of investments funds,
          cash flow from operations, and/or from co-development partners, who in
          turn have cash flow notes from the properties.  In connection with our
          co-development agreements, affiliates of CharterMac issue construction
          completion,  development  deficit  guarantees  and  operating  deficit
          guarantees  to the lender  and  investment  funds (for the  underlying
          financing of the  properties)  on behalf of our  subsidiary  (see Note
21).                                                        

E. CASH AND CASH EQUIVALENTS                                                    

Cash and cash  equivalents  include cash in banks and  investments in short-term
instruments with an original  maturity of three months or less.  Restricted cash
includes  collateral for borrowings  within our  securitization  programs and in
accordance with Fannie Mae and Freddie Mac requirements.                        

72

10-K
73rd Page of 151
TOC
1st
Previous
Next
Bottom
Just 73rd

 CHARTERMAC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

F. DEFERRED COSTS                                                               

We  capitalize  costs  incurred in connection  with our debt and  securitization
programs (see Note 8) and amortize them on a straight-line  basis over the terms
of the debt facilities,  or 10 years,  which  approximates the average remaining
term to maturity of the mortgage revenue bonds in the securitization programs.  

We capitalize costs incurred in connection with the issuance of preferred shares
of our Equity Issuer subsidiary and amortize them on a straight-line  basis over
the period to the mandatory  repurchase  date of the shares.  We record costs we
incur in connection with the issuance of equity as a reduction of the applicable
beneficial owners' equity.                                                      

G. GOODWILL AND OTHER INTANGIBLE ASSETS                                         

Goodwill                                                                        
--------                                                                        

We test  goodwill for  impairment  (via third party  appraisals)  annually or if
circumstances  indicate there may be reason to believe  impairment has occurred.
Any such  impairment  would be  charged  to expense in the period in which it is
determined.                                                                     

Other Intangible Assets                                                         
-----------------------                                                         

We  amortize  other  intangible  assets  on a  straight-line  basis  over  their
estimated useful lives. Should goodwill be deemed impaired,  the useful lives of
identified  intangible  assets  may  need  to  be  reassessed  and  amortization
accelerated, or such intangible assets could be deemed impaired as well.        

Mortgage Servicing Rights ("MSRs")                                              
----------------------------------                                              

In  accordance  with SFAS No. 140,  ACCOUNTING  FOR  TRANFERS  AND  SERVICING OF
FINANCIAL ASSETS AND  EXTINGUISHMENT OF LIABILITIES,  we recognize as assets the
rights to service  mortgage  loans for  others,  whether  the MSRs are  acquired
through a separate  purchase or through  loans  originated  and sold.  We record
purchased MSRs at cost. For originated  loans,  we allocate total costs incurred
to the loan  originated  and the MSR retained based on the relative fair values.
In subsequent  periods,  we carry the assets at the amortized initial basis. All
MSRs are  amortized  in  proportion  to, and over the period of,  estimated  net
servicing income.                                                               

We assess MSRs for impairment  based on the fair value of the assets as compared
to carrying values.  We estimate the fair value by obtaining market  information
from  one of  the  primary  mortgage  servicing  rights  brokers.  To  determine
impairment,   the  mortgage  servicing  portfolio  is  stratified  by  the  risk
characteristics  of the  underlying  mortgage loans and we compare the estimated
fair value of each stratum to its  carrying  value.  When the carrying  value of
capitalized   servicing  assets  exceeds  fair  value,  we  recognize  temporary
impairment  through a  valuation  allowance;  fair value in excess of the amount
capitalized is not recognized.  In addition,  we periodically  evaluate our MSRs
for  other-than-temporary  impairment  to determine  whether the carrying  value
before the  application  of the  valuation  allowance  is  recoverable.  When we
determine  that a portion of the balance is not  recoverable,  the asset and the
valuation  allowance  are  reduced  to  reflect  permanent  impairment.  For the
servicing portfolio associated with our mortgage originating activities, we have
determined that the predominant risk  characteristic is the existence or absence
of loss sharing  provisions  associated with the underlying loans. For our other
servicing portfolios we have determined that the predominant risk characteristic
is the  ability  to  generate  a  consistent  income  stream per loan due to the
short-term  nature of the loans being  serviced or due to the fact that  certain
servicing revenues are not recurring.                                           

We account for exposure to loss under our  servicing  contracts  with Fannie Mae
and Freddie Mac through a provision  for loan losses and record the reserve as a
contra-asset  applied to the MSR  balance.  The  exposure to loss  results  from
guarantees made to Fannie Mae and Freddie Mac under the "DUS" and "DUI" programs
to share the risk of loan losses (See Note 21 for more  details).  The provision
recorded is considered the fair value of the guarantees.  Our  determination  of
the  adequacy  of the  reserve  for  losses  on  loans  serviced  is based on an
evaluation  of the risk  characteristics  and exposure to loss  associated  with
those loans.  Our assessment is based on a number of factors,  including but not
limited to general economic  conditions,  inability of the borrower to meet debt
service  requirements,  or a substantial decline in the value of the collateral.
For  performing  loans,  we  maintain a general  reserve,  which is based on the

73

10-K
74th Page of 151
TOC
1st
Previous
Next
Bottom
Just 74th

 CHARTERMAC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

stratification  of the loan servicing  portfolio by debt service  coverage ratio
(DSCR). The probability of default and loss is higher for loans with lower DSCRs
and  therefore a higher  reserve is  maintained  for such loans.  For  defaulted
loans, we maintain a loan specific  reserve based on an estimate of our share of
the loss.                                                                       

H. FINANCIAL RISK MANAGEMENT AND DERIVATIVES                                    

We account  for  derivative  financial  instruments  pursuant  to SFAS No.  133,
ACCOUNTING FOR DERIVATIVE  INSTRUMENTS AND HEDGING  Activities ("SFAS No. 133"),
as amended and interpreted. We record derivatives at fair value, with changes in
fair value of those that we classify as cash flow hedges recorded in accumulated
other  comprehensive  income,  to the  extent  they  are  effective.  If  deemed
ineffective,  we record the amount  considered  ineffective in the  consolidated
statement of income.                                                            

We have determined that we will not apply hedge accounting to fair value hedges.
Any change in the fair value of these  hedges is  therefore  included in current
period net  income.  As of  December  31,  2006,  we did not have any fair value
hedges.                                                                         

I. RESALE AND REPURCHASE AGREEMENTS                                             

We account for transactions  involving  purchases of securities under agreements
to  resell  (reverse  repurchase  agreements  or  reverse  repos)  or  sales  of
securities  under agreements to repurchase  (repurchase  agreements or repos) as
collateralized financing liabilities, except when we do not have an agreement to
sell (or purchase) the same or substantially the same securities before maturity
at a fixed or determinable price.                                               

J. FAIR VALUE OF FINANCIAL INSTRUMENTS                                          

As described  above, our investments in mortgage revenue bonds, our MSRs and our
derivatives  are carried at estimated fair values.  We have  determined that the
fair  value  of  our  remaining  financial   instruments,   including  temporary
investments,  cash and cash equivalents,  promissory notes receivable,  mortgage
notes  receivable and borrowings  approximate  their carrying values at December
31, 2006 and 2005, due primarily to their short term nature or variable rates of
interest.                                                                       

K. INCOME TAXES                                                                 

We provide for income  taxes in  accordance  with SFAS No. 109,  ACCOUNTING  FOR
INCOME TAXES ("SFAS No. 109"),  which  requires the  recognition of deferred tax
assets and  liabilities  for the expected  future tax  consequences of temporary
differences  between the financial  statement carrying amounts and the tax basis
of assets and liabilities.  We assess the  recoverability of deferred tax assets
through evaluation of carryback availability, projected taxable income and other
factors as  applicable.  If we  determine  that  deferred  tax assets may not be
recoverable, we record a valuation allowance as appropriate.                    

L. NET INCOME PER SHARE                                                         

Basic net  income  per share  represents  net  income  allocated  to Common  and
Convertible  CRA  shareholders  (see Note 17) by the weighted  average number of
Common and Convertible  CRA shares  outstanding  during the period.  Diluted net
income per share  includes the  weighted  average  number of shares  outstanding
during  the  period  and  the  dilutive  effect  of  common  share  equivalents,
calculated using the treasury stock method.                                     

The  Convertible  CRA  shareholders  are included in the  calculation  of shares
outstanding  as they share the same  economic  benefits as common  shareholders.
SCUs, SMUs, SCIs and 4.4% Convertible CRA preferred shares (see Notes 13 and 14)
are not included in the calculation as they are antidilutive.                   

74

10-K
75th Page of 151
TOC
1st
Previous
Next
Bottom
Just 75th

 CHARTERMAC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

M. CREDIT INTERMEDIATION TRANSACTIONS                                           

For guarantees and other credit intermediation transactions issued since January
1, 2003, we record liabilities (included in deferred revenues) equal to the fair
values of the  obligations  undertaken.  For  transactions  for which we receive
fees,  we consider the fees received to be fair value,  in accordance  with FASB
Interpretation  No. 45, GUARANTOR'S  ACCOUNTING AND DISCLOSURE  REQUIREMENTS FOR
GUARANTEES,  INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS ("FIN 45").
For  completion  and other  guarantees  issued  to  lenders  for the  underlying
financing  of  properties,  as  required by an  investment  fund,  we  generally
recognize  no  liability  upon  inception  of the  guarantee  as the exposure is
considered  minimal and no fee is received.  We monitor our exposure under these
agreements  and,  should we determine a loss is probable,  accrue a liability in
accordance with SFAS No. 5, ACCOUNTING FOR CONTINGENCIES.                       

N. SHARE BASED COMPENSATION                                                     

We record  restricted  share grants as a reduction of beneficial  owners' equity
within  shareholders'  equity.  The balance recorded equals the number of shares
issued  (and that we  expect to vest)  multiplied  by the  closing  price of our
common shares on the grant date. We recognize the value of the awards as expense
in our  consolidated  statement  of income  on a  straight-line  basis  over the
applicable service periods.  For each separately vesting portion of an award, we
record the  expense as if the award  was,  in  substance,  multiple  awards.  We
expense any shares granted with immediate vesting when granted.                 

Because share-based compensation is based on awards that we ultimately expect to
vest, share-based compensation expense has been reduced to account for estimated
forfeitures. Statement of Financial Accounting Standards No. 123(R), SHARE-BASED
PAYMENT ("SFAS No. 123(R)") requires  forfeitures to be estimated at the time of
grant and revised,  if necessary,  in subsequent  periods if actual  forfeitures
differ  from  those  estimates.  In  periods  prior to 2006,  we  accounted  for
forfeitures as they occurred.                                                   

Under SFAS No. 123(R), we are required to select a valuation technique or option
pricing model that meets the criteria as stated in the standard.  At present, we
use the Black-Scholes model, which requires the input of subjective assumptions.
These  assumptions  include  estimating the length of time employees will retain
their vested  stock  options  before  exercising  them  ("expected  term"),  the
estimated  volatility of the Company's common stock price over the expected term
("volatility"), the risk free interest rate and the dividend yield.             

O. CONSOLIDATED PARTNERSHIPS                                                    

"Consolidated Partnerships" consist of four groups:                             

     o    Certain  funds we  sponsor  to  syndicate  LIHTC  Investments  ("LIHTC
Partnerships");                                             
     o    Property  level  partnerships  for which we have  assumed  the role of
general partner ("Property Partnerships");                  
     o    CMBS Partnerships we sponsor, which we initially consolidated upon the
          ARCap Investors LLC ("ARCap") acquisition in August 2006 (see Note 2);
and                                                         
     o    a Direct Loan  Partnership  we manage and  consolidate,  which we also
consolidated following the ARCap acquisition.               

LIHTC Partnerships                                                    
------------------                                                    

     Through our  acquisition  of CharterMac  Capital,  and in  subsequent  fund
     originations,  we became the general partner or equivalent in more than 130
     entities in which we have  little or no  financial  investment.  Typically,
     outside  investors  acquire all partnership  interest in an upper-tier,  or
     investment partnership, or 100% of the membership interest if structured as
     a limited liability company. The investment  partnership,  in turn, invests
     as a limited  partner in one or more  lower-tier  (operating)  partnerships
     that own and operate the  multifamily  housing  complexes.  Partners in the
     investment partnerships are most often corporations who are able to utilize
the tax benefits, which are comprised of operating losses and LIHTCs. 

75

10-K
76th Page of 151
TOC
1st
Previous
Next
Bottom
Just 76th

 CHARTERMAC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

     Investment partnerships in which the limited partners or limited members do
     not have the right to remove us as the general  partner or managing  member
     are variable interest  entities ("VIEs") as defined by FASB  Interpretation
     No. 46(R),  CONSOLIDATION OF VARIABLE INTEREST  ENTITIES ("FIN 46(R)").  We
     have concluded  that, as the general  partner or managing  member for these
     type of investments, we are the primary beneficiary as defined by FIN 46(R)
     because we absorb the majority of the expected income and loss  variability
     (as we are entitled to fees and are the "decision maker" of the funds), and
     such  variability is  disproportionate  to our actual  ownership  interest,
     which in most cases is none although  some of our  executive  officers have
     nominal,   indirect  equity  interests  in  many  of  the  funds.  We  have
     consolidated  the assets and  liabilities  of these entities in our balance
     sheets and have recorded  their results of operations in our  statements of
income beginning April 1, 2004.                                       

     For the LIHTC Partnerships, the balance sheets and statements of operations
     included in our 2006  consolidated  financial  statements are as of and for
     the year ended September 30, 2006, the latest date available. Likewise, the
     amounts included in the 2005  consolidated  financial  statements are as of
     and for the year ended  September  30,  2005.  Upon  receipt  of  full-year
     audited  results,  we include  any  adjustments  to  amounts we  previously
recorded in the next quarterly reporting period.                      

Property Partnerships                                                 
---------------------                                                 

     We have  the  general  partner  interest  in 55  lower-tier  property-level
     operating partnerships in which we have little or no ownership interest. We
     assumed the general  partner  interest  in these  partnerships  in order to
     protect our interests in the underlying properties.  As with the investment
     funds described  above, the limited partners or limited members do not have
     the right to remove us as the general partner or managing member.  Although
     these entities are not VIEs, we are deemed to control them and  consolidate
     them pursuant to ARB No. 51, CONSOLIDATED  FINANCIAL STATEMENTS or SOP 78-9
ACCOUNTING FOR INVESTMENTS IN REAL ESTATE VENTURES ("SOP 78-9).       

     For the  Property  Partnerships,  the  balance  sheets  and  statements  of
     operations  consolidated in our 2006 consolidated  financial statements are
     as of and for the year ended September 30, 2006, the latest date available.
     Likewise,   the  amounts  included  in  the  2005  consolidated   financial
statements are as of and for the year ended September 30, 2005.       

CMBS Partnerships                                                     
-----------------                                                     

     CMBS partnerships are funds we sponsor in which we have minority  interests
     but for  which  our  subsidiaries  are  general  partners.  Although  these
entities are not VIEs, we control them and consolidate them.          

Direct Loan Partnership                                               
-----------------------                                               

     ARCap Real Estate  Special  Situations  Mortgage  Fund,  LLC ("ARESS") is a
     direct loan fund we sponsor,  in which we have a 5% interest  and for which
     one of our subsidiaries is the general partner. Although this entity is not
     a VIE, we control it and consolidate it pursuant to EITF 04-5,  DETERMINING
     WHETHER A GENERAL PARTNER,  OR THE GENERAL PARTNERS AS A GROUP,  CONTROLS A
     LIMITED  PARTNERSHIP  OR SIMILAR  ENTITY  WHEN THE  LIMITED  PARTNERS  HAVE
     CERTAIN  RIGHTS ("EITF 04-5").  ARESS invests in bridge loans,  subordinate
     interests in first mortgages  ("B-notes") and subordinate  loans secured by
interests in the borrowing entity ("mezzanine loans").                

     For  the  CMBS  and  Direct  Loan  Partnerships,  the  balance  sheets  and
     statements of operations  consolidated in our 2006  consolidated  financial
statements are as of and for the period ended December 31, 2006.      

P. NEW ACCOUNTING PRONOUNCEMENTS                                                

Effective  March 31, 2004, we adopted FIN 46(R) which  clarified the application
of  existing  accounting  pronouncements  to certain  entities  in which  equity
investors do not have the characteristics of a controlling financial interest or
do not have  sufficient  equity at risk for the entity to finance its activities
without  additional  subordinated  financial  support  from other  parties.  See
CONSOLIDATED  PARTNERSHIPS,  above,  regarding  the impact of our adopting  this
standard.                                                                       

76

10-K
77th Page of 151
TOC
1st
Previous
Next
Bottom
Just 77th

 CHARTERMAC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

In November  2005,  the FASB issued Staff Position 115 / 124 - 1, THE MEANING OF
OTHER-THAN-TEMPORARY  IMPAIRMENT AND ITS APPLICATION TO CERTAIN INVESTMENTS. The
Staff Position clarified,  among other matters,  the determination as to when an
unrealized loss on debt securities  should be reflected in the income  statement
as opposed to accumulated  other  comprehensive  income.  The Staff Position was
effective as of the first quarter of 2006. Application of the Staff Position had
no material impact on our results of operations.                                

During the first quarter of 2006, we adopted SFAS No. 123(R) which replaces SFAS
No. 123,  ACCOUNTING FOR STOCK-BASED  COMPENSATION ("SFAS No. 123"). Among other
things, SFAS No. 123(R) requires that companies record the value of stock option
grants as  compensation  expense,  while SFAS No. 123 allowed  disclosure of the
impact  instead  of  recording  the  expense.  As we  had  been  accounting  for
share-based  payments as an expense  following the fair value provisions of SFAS
No. 123, the impact of adopting this standard was not material to us.           

In March 2006, the FASB issued Statement of Financial  Accounting  Standards No.
156, ACCOUNTING FOR SERVICING OF FINANCIAL Assets ("SFAS No. 156"). SFAS No. 156
stipulates the accounting for MSRs and requires that they be recorded  initially
at fair value.  SFAS No. 156 also  permits,  but does not  require,  that we may
subsequently  record  those  MSRs at  fair  value  with  changes  in fair  value
recognized in the  statement of  operations.  Alternatively,  we may continue to
amortize the MSRs over their projected  service periods.  We will adopt SFAS No.
156, as  required,  in the first  quarter of 2007 and do not expect any material
impact  in our  consolidated  financial  statements  as we  intend  to  continue
amortization of our MSRs.                                                       

In June 2006, the FASB issued  Interpretation No. 48 ("FIN 48"),  ACCOUNTING FOR
UNCERTAINTY  IN  INCOME  TAXES,  an  interpretation  of  SFAS  No.  109.  FIN 48
prescribes a comprehensive  model for how companies should  recognize,  measure,
present and disclose  uncertain tax positions taken or expected to be taken on a
tax return.  Under FIN 48, we shall  initially  recognize  tax  positions in the
consolidated  financial  statements when it is more likely than not the position
will be sustained upon  examination by the tax  authorities.  We shall initially
and subsequently measure such tax positions as the largest amount of tax benefit
that is greater than 50% likely of being realized upon ultimate  settlement with
the tax  authority  assuming  full  knowledge  of the  position and all relevant
facts. FIN 48 also revises disclosure  requirements to include an annual tabular
rollforward of unrecognized tax benefits.  We will adopt this  interpretation as
required in 2007 and will apply its provisions to all tax positions upon initial
adoption with any cumulative  effect  adjustment  recognized as an adjustment to
retained  earnings.  We are  still  evaluating  the  impact of  adoption  on our
consolidated financial statements.                                              

In September 2006, the FASB issued Statement of Financial  Accounting  Standards
No. 157, FAIR VALUE MEASUREMENTS,  which established a framework for calculating
the  fair  value of  assets  and  liabilities  as  required  by  numerous  other
accounting  pronouncements,  and  expands  disclosure  requirements  of the fair
values of certain assets and  liabilities.  The statement is effective as of our
2008 fiscal year.  We are  currently  evaluating  the impact,  if any,  that the
adoption of this Statement will have on our consolidated financial statements.  

In September 2006, the Securities and Exchange  Commission  ("SEC") issued Staff
Accounting Bulletin No. 108, CONSIDERING THE EFFECTS OF PRIOR YEAR MISSTATEMENTS
WHEN QUANTIFYING MISSTATEMENTS IN CURRENT YEAR FINANCIAL STATEMENTS ("SAB 108").
SAB 108 provides  interpretive  guidance on how the effects of the  carryover or
reversal of prior year  misstatements  should be  considered  in  quantifying  a
current  year  misstatement.  The SEC  staff  believes  that  registrant  should
quantify errors using both a balance sheet and an income statement  approach and
evaluate  whether either  approach  results in quantifying a misstatement  that,
when all  relevant  quantitative  and  qualitative  factors are  considered,  is
material.  SAB 108 was effective for 2006 and adoption of the SAB did not have a
material effect on the consolidated financial statements.                       

In February 2007, the FASB issued  Statement of Financial  Accounting  Standards
No. 159, THE FAIR VALUE OPTION FOR FINANCIAL  ASSETS AND FINANCIAL  LIABILITIES.
This Statement permits entities to choose to measure many financial  instruments
and  certain  other  items at fair value that are not  currently  required to be
measured at fair value under  existing GAAP.  This  Statement  also  establishes
presentation  and  disclosure  requirements  designed to facilitate  comparisons
between entities that choose different measurement  attributes for similar types
of  assets  and  liabilities.  This  Statement  does  not  affect  any  existing
accounting literature that requires certain assets and liabilities to be carried

77

10-K
78th Page of 151
TOC
1st
Previous
Next
Bottom
Just 78th

 CHARTERMAC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

at fair value.  We will adopt the provision of this Statement,  as required,  in
the first quarter of 2008. We are currently  evaluating  the impact of adoption,
if any, on our consolidated financial statements.                               

Q. RECLASSIFICATIONS                                                            

Certain  amounts from prior years have been  reclassified to conform to the 2006
presentation,  including the  reclassification of real estate owned from a "Held
for Sale" classification to "Held and Used", and associated reclassifications in
the income statement pertaining to operations of these properties.              

NOTE 2 - ACQUISITIONS                                                           

A.  ARCAP                                                                       

In August 2006, we acquired all of the membership interests in ARCap that we had
not previously  owned (see Note 4). ARCap is a fund manager  specializing in the
acquisition,  management  and servicing of high-yield  CMBS.  The total purchase
price of approximately $275.3 million included:                                 

 o    cash of approximately $263.3 million, including transaction costs;
     o    approximately   268,000  Special  Common   Interests   ("SCIs")  of  a
          subsidiary (see Note 13) with a value of  approximately  $4.9 million;
and                                                         
     o    the remaining  basis of our prior  investment in ARCap  (approximately
          $7.1 million) which had been reduced by distributions accounted for as
returns of capital (see Note 4).                            

Of the total purchase  price,  $22.5 million has been placed into escrow,  which
amounts will be released based on certain  future events,  some of which are not
under our  control.  Should the events not under our control  occur,  up to $7.5
million of the amount held back could  revert to us.  These  contingencies  will
expire in 2007 and 2008.                                                        

The cash portion of the acquisition and associated acquisition costs were funded
by a new credit  facility (see Note 9). In connection with the  acquisition,  we
also  issued  approximately  1.7  million  restricted  common  shares  to  ARCap
employees (see Note 15).                                                        

We accounted for the acquisition as a purchase, and accordingly, we included the
results  of  operations  in  the  consolidated  financial  statements  from  the
acquisition  date. We allocated our cost of the  acquisition on the basis of the
estimated fair values of the assets acquired and liabilities  assumed. We valued
intangible assets based on appraisals by independent valuation firms. The excess
of the  purchase  price over the net amounts  assigned  to the assets  acquired,
including identified intangibles,  and the liabilities assumed was recognized as
goodwill.                                                                       

The following table  summarizes the assets acquired and the liabilities  assumed
in connection with the ARCap acquisition (in thousands):                        

Cash and cash equivalents                                  $     720            
Restricted cash                                                  156            
Other investments                                            132,746            
Goodwill                                                     110,504            
Other intangible assets                                       18,998            
Deferred costs and other assets                               13,283            
Investments in consolidated partnerships                      45,504            
Financing arrangements                                       (32,513)           
Accounts payable, accrued expenses and other liabilities     (14,141)           
                                               ---------

Total purchase price                                       $ 275,257            
                                               =========

78

10-K
79th Page of 151
TOC
1st
Previous
Next
Bottom
Just 79th

 CHARTERMAC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Pro Forma results of operations  assuming we had  consummated the acquisition on
January 1, 2005, are as follows:                                                

                                                                [Download Table]


                                            Year Ended December 31,
                                            -----------------------
                                                  (Unaudited)      
                                            -----------------------
(In thousands, except per share amounts)       2006         2005   
----------------------------------------    ----------   ----------
                                                                   
Total revenues                               $474,543     $420,836 
Net income                                   $ 56,927     $ 78,565 
Net income per share:                                              
   Basic                                     $  0.90      $   1.32 
   Diluted                                   $  0.87      $   1.30 


B.  CHARTERMAC REAL ESTATE SECURITIES                                           

In March  2006,  we  acquired  Capri Real  Estate  Services  from Capri  Capital
Advisors LLC ("CCA"), and renamed it CharterMac Real Estate Securities ("CRES").
CRES was a manager of hedge funds and other funds  concentrating on investing in
securities of publicly traded real estate companies.                            

The  consideration  paid  was  approximately  $7.3  million.  The  consideration
included the redemption of the preferred interest we held in CCA, valued at $4.1
million,  plus  approximately  $3.2 million of costs and advances we had made to
CCA with respect to this business (see Note 4).                                 

We accounted for the acquisition as a purchase and, accordingly, we included the
results  of  operations  in  the  consolidated  financial  statements  from  the
acquisition  date. We allocated our cost of the  acquisition on the basis of the
estimated fair values of the assets and liabilities  assumed.  The excess of the
purchase price over the net of the amounts  assigned to the assets  acquired and
liabilities assumed was recognized as goodwill of approximately $6.1 million.   

In October 2006, we decided to cease operations at CRES. As part of an agreement
with CRES' founder, certain subsidiary equity units that we had issued (see Note
13) were  returned and others held in escrow were  cancelled.  In addition,  the
founder  assumed CRES' line of credit.  In connection  with this  agreement,  we
reduced goodwill by $5.1 million for the  cancellation of the subsidiary  equity
units held in escrow as well as the  subsidiary  equity units returned to us and
the assumption of the line of credit.  We also recognized a goodwill  impairment
charge of  approximately  $1.0  million to account  for the portion of our total
investment  in, and advances to, CRES that we did not recover and  wrote-off the
$1.6 million  unamortized  balance of other intangible  assets recognized at the
time of the acquisition.                                                        

Pro forma  information is not presented for the acquisition or discontinuance as
this business is not material to our revenues, net income or assets.            

C. CAPRI CAPITAL LIMITED PARTNERSHIP                                            

Effective  March 1, 2005, we purchased 100% of the ownership  interests of Capri
Capital  Limited  Partnership  ("CCLP").  The initial  purchase  price was $70.0
million plus $1.8 million of acquisition costs. Subsequently, the sellers earned
$15.0 million of additional consideration based on the 2004 financial results of
CCLP's mortgage  banking  business.  The initial purchase price of $70.0 million
was  paid  via  conversion  into  equity  of our  existing  loan to CCLP and its
affiliates  (collectively "Capri") (see Note 4). Of the additional $15.0 million
contingent  consideration,  we issued  subsidiary  equity  units for half of the
amount (see Note 13), and paid the balance in cash. Pro forma financial  results
for CCLP are not  presented as the  acquisition  was not material to our assets,
revenues or net income.                                                         

79

10-K
80th Page of 151
TOC
1st
Previous
Next
Bottom
Just 80th

 CHARTERMAC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

D. CHARTERMAC MORTGAGE CAPITAL CORP.                                            

Prior to 2005,  we  acquired  87% of the common  shares of  CharterMac  Mortgage
Capital Corp.  ("CMC").  In 2005, we purchased the remaining shares and made the
final payments  under the terms of the original  purchase  agreement.  The total
purchase price of the 2005 transactions was $7.9 million,  $7.5 million of which
we paid in cash and the balance was paid in stock. The 2005 transaction resulted
in $3.6 million of additional goodwill.                                         

NOTE 3 - MORTGAGE REVENUE BONDS                                                 

A. GENERAL                                                                      

All of our mortgage  revenue  bonds bear fixed base  interest  rates and, to the
extent  permitted  by existing  regulations,  may also  provide  for  contingent
interest and other features.  Terms generally are five to 35 years,  although we
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).  In some
cases, the bonds call for amortization or "sinking fund" payments,  generally at
the completion of rehabilitation or construction, of principal based on 30 to 40
year level debt service amortization schedules.                                 

The  principal and interest  payments on each mortgage  revenue bond are payable
primarily from the cash flows of the underlying  properties,  including proceeds
from a sale of a property or the  refinancing  of the mortgage  loan  securing a
bond. None of the mortgage revenue bonds constitute a general  obligation of any
state or local government,  agency or 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 mortgage revenue bonds, the owners
of the  underlying  properties  are  required to enter into  agreements  to own,
manage and  operate  the  properties  in  accordance  with  requirements  of the
Internal Revenue Code of 1986, as amended.  If they do not comply,  the interest
income we receive could be subject to taxes.                                    

Certain  mortgage  revenue bonds provide for  "participating  interest" which is
equal to a percentage of net property  cash flow of the net sale or  refinancing
proceeds. Bonds that contain these provisions are referred to as "participating"
while  the  rest are  "non-participating".  Both the  stated  and  participating
interest on the mortgage revenue bonds are exempt from federal income tax. As of
December 31,  2006,  we had two  participating  bonds with a fair value of $20.2
million.  Participating  interest  included in mortgage  revenue  bond  interest
income was approximately $5.2 million in 2006, $2.6 million in 2005 and $230,000
in 2004.                                                                        

No single  mortgage  revenue bond provided  interest income that exceeded 10% of
our total revenue for the years ended December 31, 2006, 2005, or 2004.         

Mortgage revenue bonds are generally not subject to optional  prepayment  during
the first five to ten years of our ownership  and may carry  various  prepayment
penalty  structures.  Certain  mortgage  revenue  bonds  may be  purchased  at a
discount from their face value.                                                 

In selected circumstances, and generally only in connection with the acquisition
of tax-exempt  mortgage  revenue bonds, we may acquire a small amount of taxable
bonds:                                                                          

     o    which  we may be  required  to  acquire  in  order  to  satisfy  state
     regulations with respect to the issuance of tax-exempt bonds; and
     o    to fund certain costs  associated  with the issuance of the tax-exempt
          bonds,  that under current law cannot be funded by the proceeds of the
tax-exempt bond itself.                                     

80

10-K
81st Page of 151
TOC
1st
Previous
Next
Bottom
Just 81st

 CHARTERMAC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

B. SUMMARY                                                                      

The following  tables  summarize our mortgage revenue bond portfolio at December
31, 2006:                                                                       

                                                        [Enlarge/Download Table]


                                                                                                  (Dollars in Thousands)    

                                        Units            Face Amount of Bond (1)    Fair Value at 12/31/06                  
                                ---------------------    -----------------------    -----------------------                 

                                                                                                               Current      
                                                                                                                Stated      
                     Number                   % of                       % of                       % of       Interest     
                    of Bonds     Number       Total       $ Amount       Total       $ Amount       Total        Rate       
                    --------    --------    ---------    ----------    ---------    ----------    ---------    --------     
                                                                                                                            
BY STATE: (2)                                                                                                               
----------------                                                                                                            
Texas                  81        14,675       26.20%     $  781,803      27.70%     $  784,940      28.08%       6.83%      
Georgia                34         7,600       13.60%        406,336      14.40%        395,120      14.14%       6.50%      
California             62         6,135       10.90%        356,717      12.70%        354,482      12.68%       6.53%      
Missouri               35         3,026        5.40%        166,543       5.90%        163,887       5.86%       6.27%      
Florida                23         3,768        6.70%        154,800       5.50%        147,559       5.28%       7.01%      
All others            142        20,844       37.20%        952,248      33.80%        949,078      33.96%       6.60%      
----------------------------------------------------------------------------------------------------------------------------
Subtotal              377        56,048      100.00%      2,818,447     100.00%      2,795,066     100.00%       6.64%      
                                                                                                               ========     
Eliminations (3)      (44)       (7,614)         --        (401,032)        --        (397,328)                             
--------------------------------------------------------------------------------------------------                          
Total                 333        48,434          --      $2,417,415         --      $2,397,738                              
==================================================================================================                          
2005 Total            295        47,513          --      $2,237,699         --      $2,294,787                              
==================================================================================================                          

BY PROPERTY                                                                                                                 
STATUS:                                                                                                                     
---------------                                                                                                             
Stabilized            156        26,449       47.20%     $1,164,075      41.30%     $1,187,925      42.50%       7.03%      
Lease-up              114        15,659       27.90%        866,298      30.70%        841,043      30.09%       6.75%      
Construction           29         4,811        8.60%        283,207      10.10%        277,503       9.93%       6.07%      
Rehab                  78         9,129       16.30%        504,867      17.90%        488,595      17.48%       5.90%      
----------------------------------------------------------------------------------------------------------------------------
Subtotal              377        56,048      100.00%      2,818,447     100.00%      2,795,066     100.00%       6.64%      
                                                                                                               ========     
Eliminations (3)      (44)       (7,614)         --        (401,032)        --        (397,328)                             
--------------------------------------------------------------------------------------------------                          
Total                 333        48,434          --      $2,417,415         --      $2,397,738                              
==================================================================================================                          
2005 Total            295        47,513          --      $2,237,699         --      $2,294,787                              
==================================================================================================                          



                      Pertinent Weighted Average Dates      Annualized Base Interest                                        
                    ---------------------------------------  ------------------------                                       
                                                                                                        Debt                
                                                                                                       Service              
                                                                                        Occupancy      Coverage             
                                 Optional                                                   on         Ratio on             
                                Redemption                                   % of       Stabilized    Stabilized            
                    Put Date       Date       Maturity Date    $ Amount      Total      Properties    Properties            
                    --------    ----------    -------------    --------    ---------    ----------    ----------            
                                                                                                                            
BY STATE: (2)                                                                                                               
----------------                                                                                                            
Texas                May-20       Nov-19          Nov-41       $ 53,404      30.00%       89.9%          0.94x              
Georgia              Apr-21       Jun-20          Feb-44         23,698      13.30%       91.3%          0.90x              
California           Apr-20       Mar-19          Feb-40         20,294      11.40%       96.3%          1.34x              
Missouri             Nov-21       Aug-21          Jun-37         10,410       5.80%       93.0%          1.12x              
Florida              Aug-20       Jan-18          Jun-41         10,855       6.10%       96.1%          1.26x              
All others           Aug-20       Apr-19          Jun-39         59,617      33.40%       94.1%          1.19x              
----------------------------------------------------------------------------------------------------------------            
Subtotal             Sep-20       Sep-19          Nov-40        178,278     100.00%       93.6%          1.10x              
                                                               =================================================            
Eliminations (3)                                                                                                            
--------------------                                                                                                        
Total                                                                                                                       
====================                                                                                                        
2005 Total                                                     $167,415     100.00%       94.1%          1.12x              
====================                                           =================================================            

BY PROPERTY                                                                                                                 
STATUS:                                                                                                                     
---------------                                                                                                             
Stabilized           Mar-19       Oct-17          May-39       $ 81,782      45.90%       93.6%          1.10x              
Lease-up             Oct-20       Jul-19          Mar-41         58,504      32.80%        N/A            N/A               
Construction         Jul-22       Jul-22          Nov-43         16,244       9.10%        N/A            N/A               
Rehab                Jan-23       Dec-22          Feb-42         21,748      12.20%        N/A            N/A               
----------------------------------------------------------------------------------------------------------------            
Subtotal             Sep-20       Sep-19          Nov-40        178,278     100.00%       93.6%          1.10x              
                                                               =================================================            
Eliminations (3)                                                                                                            
--------------------                                                                                                        
Total                                                                                                                       
====================                                                                                                        
2005 Total                                                     $167,415     100.00%       94.1%          1.12x              
====================                                           =================================================            


(1) Original principal amount at issuance.                                      
(2) Other than those  detailed,  based on face amount,  no state  comprises more
than 10% of the total at December 31, 2006 or 2005.                             
(3) These bonds are either  recorded  as  liabilities  on the balance  sheets of
certain consolidated  partnerships or are recorded as liabilities of real estate
owned and are therefore eliminated in consolidation.                            

81

10-K
82nd Page of 151
TOC
1st
Previous
Next
Bottom
Just 82nd

 CHARTERMAC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

                                                        [Enlarge/Download Table]


                                         Units         Face Amount of Bond (1)   Fair Value at 12/31/06                
                                  -------------------  -----------------------   ----------------------                
                      Number of                % of                     % of                     % of    Current Stated
                        Bonds      Number      Total     $ Amount       Total     $ Amount       Total    Interest Rate
                      ---------   --------    -------   -----------    -------   -----------    -------  --------------
BY PUT DATE:                                                                                                           
----------------                                                                                                       
                                                                                                                       
No put date               83          972       1.70%   $  168,748       6.00%   $  151,168       5.41%       6.66%    
6 months notice            2          546       1.00%       20,200       0.80%       20,200       0.72%       8.06%    
2007-2010                  3          298       0.50%       17,523       0.60%       17,518       0.63%       6.74%    
2011-2015                  6        1,286       2.30%       56,163       2.00%       57,729       2.07%       6.94%    
2016-2020                159       30,507      54.40%    1,412,566      50.00%    1,407,713      50.37%       6.97%    
2021-2025                107       19,320      34.50%      985,764      35.00%      977,561      34.97%       6.15%    
2026-2030                 15        2,943       5.30%      149,198       5.30%      154,667       5.53%       6.53%    
2031-2035                  2          176       0.30%        8,285       0.30%        8,510       0.30%       6.63%    
-----------------------------------------------------------------------------------------------------------------------
Subtotal                 377       56,048     100.00%    2,818,447     100.00%    2,795,066     100.00%       6.64%    
                                                                                                =======================
Eliminations (2)         (44)      (7,614)        --      (401,032)        --      (397,328)                           
--------------------------------------------------------------------------------------------                           
Total                    333       48,434               $2,417,415               $2,397,738                            
============================================================================================                           
2005 Total               295       47,513         --    $2,237,699         --    $2,294,787     100.00%       6.63%    
=======================================================================================================================

BY MATURITY                                                                                                            
DATE:                                                                                                                  
-----------------                                                                                                      
2007-2010                 28          368       0.70%   $   85,019       3.00%   $   77,766       2.78%       6.50%    
2011-2015                 30          133       0.20%       31,045       1.10%       24,790       0.89%       6.24%    
2016-2020                 25          460       0.80%       52,249       1.90%       47,925       1.71%       7.23%    
2021-2025                 19          336       0.60%       49,869       1.80%       48,380       1.73%       7.63%    
2026-2030                  9          779       1.40%       32,782       1.20%       28,960       1.04%       7.08%    
2031-2035                 12        2,597       4.60%       98,924       3.50%      102,663       3.67%       6.89%    
2036-2040                 59       11,419      20.40%      490,532      17.40%      500,305      17.90%       7.03%    
2041-2045                141       30,147      53.80%    1,455,244      51.60%    1,449,468      51.86%       6.68%    
2046 and after            54        9,809      17.50%      522,783      18.50%      514,809      18.42%       6.02%    
-----------------------------------------------------------------------------------------------------------------------
Subtotal                 377       56,048     100.00%    2,818,447     100.00%    2,795,066     100.00%       6.64%    
                                                                                                =======================
Eliminations (2)         (44)      (7,614)        --      (401,032)        --      (397,328)                           
--------------------------------------------------------------------------------------------                           
Total                    333       48,434               $2,417,415               $2,397,738                            
============================================================================================                           
2005 Total               295       47,513         --    $2,237,699         --    $2,294,787     100.00%       6.63%    
=======================================================================================================================


(1) Original principal amount at issuance.                                      
(2) These bonds are either  recorded  as  liabilities  on the balance  sheets of
certain consolidated  partnerships or are recorded as liabilities of real estate
owned and are therefore eliminated in consolidation.                            

82

10-K
83rd Page of 151
TOC
1st
Previous
Next
Bottom
Just 83rd

 CHARTERMAC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The following table  summarizes the maturity dates of mortgage  revenue bonds we
held as of December 31, 2006:                                                   

                                                                [Download Table]


                                           Outstanding                 Weighted   
                                Number of     Bond                      Average   
    (Dollars in thousands)        Bonds      Amount     Fair Value   Interest Rate
------------------------------  ---------  -----------  ----------   -------------
                                                                                  
Due in less than one year              5   $   10,766   $   10,156       6.36%    
Due between one and five years        26       75,486       68,765       6.54%    
Due after five years                 346    2,732,195    2,716,145       6.65%    
                                 -------   ----------   ----------    -------     
 Total/weighted average              377    2,818,447    2,795,066       6.64%    
                                                                      =======     
  Less: eliminations (1)             (44)    (401,032)    (397,328)               
                                 -------   ----------   ----------                
 Total                               333   $2,417,415   $2,397,738                
                                 =======   ==========   ==========                


(1) These bonds are either  recorded  as  liabilities  on the balance  sheets of
certain consolidated  partnerships or are recorded as liabilities of real estate
owned and are therefore eliminated in consolidation.                            

C. PORTFOLIO ACTIVITY                                                           

                                                                [Download Table]


Reconciliation of mortgage revenue bonds (In thousands):      2006          2005    
--------------------------------------------------------  -----------   ----------- 
                                                                                    
Balance at beginning of period                            $ 2,294,787   $ 2,100,720 
  Acquisitions and additional fundings                        419,940       443,517 
  Repayment proceeds                                          (83,746)     (104,279)
  Principal payments                                          (31,854)      (22,466)
  Realized gain                                                   544         1,541 
  Advance returned by Trustee                                      --        (6,866)
  Impairment losses                                            (4,676)       (4,555)
  Net change in fair value                                    (37,178)       86,323 
  Accretion/amortization of yield adjustments                  (3,690)       (5,384)
  Reclassification to other assets                               (629)      (34,238)
                                                          -----------   ----------- 
    Subtotal                                                2,553,498     2,454,313 
  Less: change in eliminations (1)                           (155,760)     (159,526)
                                                          -----------   ----------- 
Balance at close of period                                $ 2,397,738   $ 2,294,787 
                                                          ===========   =========== 


(1) Certain bonds are either  recorded as  liabilities  on the balance sheets of
certain consolidated  partnerships or are recorded as liabilities of real estate
owned and are therefore eliminated in consolidation.                            

83

10-K
84th Page of 151
TOC
1st
Previous
Next
Bottom
Just 84th

 CHARTERMAC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Mortgage revenue bonds acquired and/or additional  fundings made during 2006 and
2005 are summarized below:                                                      

                                                        [Enlarge/Download Table]


                                                                 Weighted      Weighted   
                                                                  Average       Average   
                                        Number of     Face     Construction    Permanent  
        (Dollars in thousands)          Bonds (1)  Amount (2)      Rate      Interest Rate
--------------------------------------  ---------  ----------  ------------  -------------
                                                                                          
2006                                                                                      
Construction/rehabilitation properties        68    $395,240       6.37%         6.04%    
Additional funding of existing bonds          --      24,700       5.28%         5.31%    
                                        --------    --------    -------       -------     
Total 2006 acquisitions                       68    $419,940       6.31%         5.99%    
                                        ========    ========    =======       =======     

2005                                                                                      
Construction/rehabilitation properties        59    $429,966       5.81%         6.17%    
Additional funding of existing bonds          --      13,551       5.36%         6.60%    
                                        --------    --------    -------       -------     
Total 2005 acquisitions                       59    $443,517       5.80%         6.19%    
                                        ===