10-K 1 a70708e10-k.txt FORM 10-K FISCAL YEAR ENDED DECEMBER 31, 2000 1 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ------------------------ (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ . COMMISSION FILE NUMBER: 0-22569 (IRVINE APARTMENT COMMUNITIES, L.P.) 1-13721 (IAC CAPITAL TRUST) IRVINE APARTMENT COMMUNITIES, L.P. IAC CAPITAL TRUST (EXACT NAME OF REGISTRANTS AS SPECIFIED IN ITS CHARTER)

550 NEWPORT CENTER DRIVE, SUITE 300, NEWPORT BEACH, CALIFORNIA 92660 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANTS' TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 720-5500 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

NUMBER OF SECURITIES OUTSTANDING AS OF DECEMBER 31, 2000: 6,000,000 SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: TITLE OF EACH CLASS: UNITS OF GENERAL PARTNERSHIP INTEREST (IRVINE APARTMENT COMMUNITIES, L.P.) NUMBER OF UNITS OUTSTANDING AS OF DECEMBER 31, 2000: 20,175,893 Indicate by check mark whether the registrants have (1) 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 time as required), and (2) has been subject to such filing requirements for the past 90 days: Irvine Apartment Communities, L.P. Yes [X] No [ ] IAC Capital Trust 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 registrants' 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. [ ] Irvine Apartment Communities LLC, the sole general partner of Irvine Apartment Communities, L.P., owns all of the outstanding units of general partnership interest of Irvine Apartment Communities, L.P. An affiliate of Irvine Apartment Communities LLC owns all of the outstanding common limited partnership units of Irvine Apartment Communities, L.P. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 2 IRVINE APARTMENT COMMUNITIES, L.P. IAC CAPITAL TRUST TABLE OF CONTENTS

i 3 PART I ITEM 1. BUSINESS ORGANIZATION AND GENERAL BUSINESS DESCRIPTION Irvine Apartment Communities, L.P. (the "Partnership"), a Delaware limited partnership, was formed on November 15, 1993. In connection with an initial public offering of common shares on December 8, 1993, Irvine Apartment Communities, Inc. ("IAC, Inc.") obtained a general partnership interest in and became the sole managing general partner of the Partnership. On June 7, 1999, IAC, Inc. was merged with and into TIC Acquisition LLC (the "Acquiror"), a Delaware limited liability company indirectly wholly owned by The Irvine Company (the "Merger"), with the Acquiror remaining as the surviving entity and renamed Irvine Apartment Communities LLC ("IACLLC"). As a result of the Merger and a related transaction in which The Irvine Company acquired an additional 74,523 common limited partnership units, The Irvine Company beneficially owns and controls all of the outstanding common partnership units in the Partnership and IACLLC has become the sole general partner of the Partnership. At December 31, 2000, IACLLC had a 44.6% general partnership interest and The Irvine Company had a 55.4% common limited partnership interest in the Partnership. The Partnership owns, operates and develops apartment communities in Orange County, California and, since 1997, other locations in California. The Partnership has created market positions in Northern California, San Diego County and Santa Monica which possess rental demographic and economic growth prospects similar to those on the Irvine Ranch. As of December 31, 2000, the Partnership owned 65 properties containing 17,941 operating apartment units and 1,540 units under construction or development (collectively, the "Properties"). IAC Capital Trust (the "Trust"), a Delaware business trust, was formed on October 31, 1997. The Trust is a limited purpose financing vehicle established by the Partnership. The Trust exists for the sole purpose of issuing its preferred securities and investing the proceeds thereof in preferred limited partner units of the Partnership. In January 1998, the Trust issued 6.0 million of 8 1/4% Series A Preferred Securities resulting in gross proceeds of $150 million. In March 1998, the Partnership and Western National Property Management ("WNPM") entered into a strategic alliance that, in April 1998, assumed all property management responsibilities for the Partnership's Southern California portfolio. Effective January 1, 1999, the property management responsibilities of the new entity, Irvine Apartment Management Company ("IAMC"), were expanded to include the Partnership's entire portfolio. The Partnership believes that this strategic alliance creates greater efficiencies and enhances service to customers. On January 1, 2000, the partnership agreement of IAMC was amended and restated whereby IAMC is owned 75% by the Partnership and 25% by WNPM. The address of the Partnership is 550 Newport Center Drive, Suite 300, Newport Beach, California 92660. Its telephone number is (949) 720-5500. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS The Partnership operates in one business segment, that of owning, operating and developing apartment communities in California. See the consolidated financial statements and notes thereto included in Item 8 of this Annual Report on Form 10-K for financial information about the industry segment. DESCRIPTION OF BUSINESS As of December 31, 2000, the Partnership owned and operated 60 stabilized properties containing 17,397 units (the "Stabilized Communities"). Together with the units under construction, development or lease-up (the "Communities Under Development"), the Partnership owns a total of 19,481 units. The majority of the Partnership's apartment communities are located on the Irvine Ranch. The Irvine Ranch is located in central Orange County, California, between San Diego and Los Angeles. The western 1 4 boundary of the Irvine Ranch borders approximately six miles of the Pacific Ocean. Today, the portion of the Irvine Ranch which is still owned by The Irvine Company covers approximately 90 square miles and includes more than 50,000 undeveloped acres. The developed portion of the Irvine Ranch, which includes significant parts of the cities of Irvine, Newport Beach and Tustin, is part of an urban master-planned community. The Irvine Ranch has been developed over the past 30 years in accordance with an original master plan (the "Master Plan") which, over time, has been refined to accord with locally approved general plans. The Irvine Ranch is one of the major commercial, retail and residential centers in Southern California. In 1997, the Partnership commenced operations in Northern California's Silicon Valley and the northern coastal markets of San Diego County. In 1998, the Partnership purchased a property in Los Angeles County. As of December 31, 2000, the Partnership had units in operation or under development at eight properties located off the Irvine Ranch. The Partnership has created these new market positions in California which possess rental demographics and economic growth prospects similar to those on the Irvine Ranch. See "Business Strategy -- Off-Ranch Properties." For the year ended December 31, 2000, the average physical occupancy (number of units occupied divided by the total number of units) of the Stabilized Communities was 95.9% and the average monthly rent per unit was $1,373. The Communities Under Development are expected to include a total of approximately 2,084 apartment units and are expected to have an aggregate estimated cost of approximately $545 million. As of December 31, 2000, 544 units were completed with 426 units occupied and generating rental revenue in Communities Under Development. The information set forth in this Annual Report on Form 10-K relating to the estimated costs of apartment communities that are in development are forward-looking statements. Actual results will depend on numerous factors, many of which are beyond the control of the Partnership. These include the extent and timing of economic growth in the Partnership's rental markets; future trends in the pricing of construction materials and labor; product design changes; entitlement decisions by local government authorities; weather patterns; changes in interest rate levels; other changes in capital markets; and unanticipated regulatory delays. No assurance can be given that the estimates will not vary substantially from actual results. BUSINESS STRATEGY Operating Strategies - Provide an exceptional living environment for residents. The Properties are located in selected markets of California with historically strong economies and highly educated, relatively affluent renters. The Properties are conceived, designed, constructed, maintained and operated to appeal to this renter base. Property sites are often chosen based on their proximity to employment centers, schools, retail centers and recreational facilities, and are usually situated amid parks, hiking trails and other open space. Community amenities often include swimming pools and spas, fitness centers, business centers with self-service computer and telecommunications services, and other, property-specific recreation facilities. The Properties are managed to deliver a high standard of customer service to all residents, with on-site staff compensation based, in part, on the annual achievement of specific customer service goals. - Enhance efficiency of operations. The Partnership had historically subcontracted on-site staffing, personnel management and accounting functions to three independent property management firms. In March 1998, the Partnership and WNPM entered into a strategic alliance that, in April 1998, assumed all property management responsibilities for the Partnership's Southern California portfolio and, in January 1999, assumed responsibility for the Partnership's entire portfolio. By centralizing all property management functions into one entity, the strategic alliance provides greater efficiencies, reduces property management fees and property management costs, improves training of on-site employees and enhances service to customers. Through December 31, 1999, WNPM was the managing member of IAMC and was responsible for its day to day operations, but the Partnership, through its control of a majority of the board of directors of IAMC, had significant control over IAMC including approval of business plans and budgets, compensation, and the employment of the executive officers of IAMC. In 2 5 addition, the Partnership paid IAMC a property management fee which was adjusted to reflect the actual operating performance of the Properties, thereby more closely aligning the interests of IAMC and the Partnership. On January 1, 2000, the partnership agreement for IAMC was amended and restated whereby the Partnership purchased a 24% partnership interest in IAMC from WNPM, resulting in the Partnership owning a 75% partnership interest in IAMC and WNPM owning a 25% partnership interest. As a result, the Partnership is now the managing member of IAMC and responsible for its day to day operations. The Partnership paid $356,000 in settlement of options previously granted to certain executives of WNPM. - Capitalize on strong brand identity within Orange County to enhance marketing efforts and extend that identity to the Partnership's other markets in California. The Partnership designs and implements marketing programs within its targeted markets to capitalize on its brand name awareness among renters in Orange County, and to broaden that recognition to potential renters in all locations where it operates. Management believes that a strong brand identity, and associated characteristics of quality and standards of service, provides the Properties with a competitive advantage in the attraction and retention of new residents. The Partnership's marketing programs share common visual and textual themes that reinforce brand identity. These programs include a website and single-source 800 telephone number to provide information on the Properties and a targeted advertising campaign promoting the Partnership's portfolio and its attractive quality of life characteristics. Development Strategies - Complete development of the Communities Under Development to complement and expand the Partnership's existing rental market base. The broad employment and renter base on the Irvine Ranch allows development of a variety of apartment property types and amenity levels, including projects designed for the family, luxury and senior markets, and the area's large population of young professionals. The Partnership's development program through market segmentation, has identified target markets and, supported by consumer research and focus group studies, market segmentation decisions have been made at the earliest planning stages, when new residential villages for the Irvine Ranch were conceived and the villages' largest and most important amenities were selected. Location of schools, recreational facilities, retail centers, open space and views were all important considerations. Individual development decisions -- including site location, product design, amenities and marketing programs -- have also been geared to appeal to the needs and desires of the target rental market. However, after completion of the Communities Under Development, the Partnership has no plans for future development. - Utilize experienced management to create high-quality, well-built properties designed to sustain their value. The Partnership brings considerable management expertise to all aspects of the development, construction and leasing process. Senior management is actively involved in new project development from the inception of a new apartment community and is responsible for target market identification; design of site plans, building plans, and floor plans; project and unit amenity selection; and site-specific governmental approvals. The Partnership engages experienced independent general contractors to act as intermediaries with subcontractors and to manage on-site activities under the close supervision of the Partnership's internal construction group. The Partnership builds properties using high-quality construction materials and techniques, and believes that this higher initial investment in quality enhances long-term value creation by sustaining high community rental income levels and reducing long-term expense levels. "Off-Ranch" Properties While the Partnership's principal focus has been on the development of apartment communities on the Irvine Ranch, in 1997 the Partnership commenced an "off-Ranch" expansion program. The Partnership's strategic growth plan was designed to create meaningful market positions off the Irvine Ranch in some of California's most promising growth centers by developing or acquiring apartment communities in areas that possess rental demographics and economic growth prospects similar to those on the Irvine Ranch. 3 6 The Partnership's "off-Ranch" expansion program was centered in Northern California's Silicon Valley and the northern coastal markets of San Diego County. In 1997, the Partnership acquired a 923-unit apartment community (The Villas of Renaissance) located in the La Jolla region of Northern San Diego County. In 1998, the Partnership completed construction of a 342-unit apartment community (The Hamptons at Cupertino) in the Silicon Valley and began development and construction on three additional apartment communities (with a total of approximately 660 units) in the Silicon Valley and two additional apartment communities (with a total of approximately 570 units) in Northern San Diego County. Also in 1998, the Partnership purchased a 120-unit, high-rise apartment building under renovation located in Santa Monica (1221 Ocean Avenue). During 1999, a 336-unit apartment community in Northern San Diego County (Arcadia at Stonecrest) was completed and achieved stabilization. In addition, the renovations at 1221 Ocean Avenue were completed and the apartment building was in lease-up at December 31, 2000. During 2000, a 155-unit apartment community in Northern California (The Villas at Bair Island Marina) was completed and achieved stabilization. Also in 2000, a 232-unit apartment community in San Diego County (La Jolla Palms) began lease-up and was 73% occupied as of December 31, 2000. The two remaining off-Ranch projects, Cherry Orchard Apartments and Franklin Street, both of which are located in Northern California, were under development at December 31, 2000. The Partnership has no plans to expand its off-Ranch portfolio beyond these eight properties. Irvine Ranch Master Plan The Irvine Company is a real estate investment and community development firm engaged in the long-term development of the Irvine Ranch. The urbanization of the Irvine Ranch began in the 1960s with the adoption of the pioneering comprehensive Master Plan for future community development which originally constituted a large map of the Irvine Ranch and a series of supporting maps detailing land uses. Subsequently, The Irvine Company worked closely with the various local jurisdictions which govern the Irvine Ranch to adopt general plans for the future development of their jurisdictions. The Irvine Company's overall Master Plan was refined to accord with the approved general plans and the residential, commercial, industrial, environmental and aesthetic balance desired by each jurisdiction. As a result, today the Irvine Ranch Master Plan is a compilation of the various interlocking general plans described above. The Irvine Company continuously engages in planning activities and the Master Plan refinement process is ongoing. The Irvine Company works closely with local government representatives, community residents and other civic and environmental groups to obtain the necessary local support and entitlements for its developments. The goal of the Master Plan was and remains to create innovative urban and suburban environments through the well-planned, coordinated development of residential communities and employment centers (which include major business and retail centers, and research and development and industrial parks) as well as civic, cultural, recreational, educational and other supportive facilities, all with an emphasis on improving the quality of life and achieving long-term balanced regional economic growth. The success of the Irvine Ranch as a master-planned development is, in large part, attributable to the early creation of a broad employment base. The Irvine Company has emphasized the promotion of job creation on the Irvine Ranch and has been involved in creating four major employment centers on the Irvine Ranch, each easily accessible by apartment residents and the surrounding area. The Irvine Company has been the sole developer of the Irvine Spectrum, a 5,000-acre research, technology and employment center which houses more than 2,500 companies and approximately 50,000 employees and includes 26 million square feet of retail, manufacturing, research and development and office space. The Irvine Business Complex, which surrounds the John Wayne airport, houses over 100,000 employees and includes more than 24 million square feet of office and other commercial space and over 14 million square feet of industrial space. Newport Center contains over 2.5 million square feet of general purpose office space, a 1.3 million square-foot regional mall (Fashion Island), a tennis club and two country clubs. In addition, The Irvine Company donated land to the University of California at Irvine, a 1,470-acre campus which currently has more than 19,600 students and 8,300 employees. The proximity of the Irvine Ranch Properties to these employment centers makes them attractive residential locations. 4 7 Market Segmentation and the Village Concept The Irvine Company's land use planning emphasizes market segmentation in order to ensure adequate and appropriate allocation of land uses which support sustained growth for the long term. Through careful planning, design and marketing, The Irvine Company also promotes compatibility and synergy among properties of the same type in order to maximize the likelihood of success of new projects, to preserve and build value for existing projects and to build sustainable long-term market value for homeowners, local merchants and employers. In accordance with the Master Plan, The Irvine Company has created twelve villages which are used as micro-planning areas in an effort to facilitate the desired segmentation of products. Each village throughout the Irvine Ranch has a distinctive, thematic identity which characterizes the primary features and attributes of the village and helps to distinguish the target market for the Partnership's product. For example, Tustin Ranch, in the City of Tustin, is a family-oriented village featuring an 18-hole championship golf course, athletic fields, jogging, hiking and equestrian trails. Along the ocean is the village of Newport Coast, an upscale community featuring ocean views and million-dollar custom built homes. The Village of Westpark, in Irvine, caters to young professionals with growing families and offers the highly renowned public school system and recreational facilities of the City of Irvine. Within each village, the Partnership's target market is further defined. The primary factor which determines the appropriate target for the product is location. For example, the professional product type is targeted towards busy work executives and professionals of all ages and is typically located near major business centers and in close proximity to entertainment, retail and dining establishments as well as major transportation corridors. The university product type, on the other hand, is located within walking distance of a college or university, student-oriented retail centers, and public transportation. Finally, the Partnership specifically designs its products to appeal to a target market. The Partnership's luxury product is typically in a unique or upscale location with ocean and golf course views and provides resort-like amenities. The family product offers spacious children's play areas and tot lots, on-site or nearby park access, individual garages, in-unit washers and dryers and may include a multi-purpose room with an activities coordinator offering activities for youngsters. Financing Strategies The Partnership intends to obtain additional debt financing to fund the capital requirements of its remaining development projects. See "Capital Expenditures -- Capital Investments in New Development." Construction costs not yet funded for these development projects total approximately $215 million. The Partnership anticipates utilizing fixed rate mortgage financing to fund these construction costs, consistent with the Partnership's strategy of maintaining a fairly low tolerance to interest rate fluctuation risk. However, based on financial market conditions at the time such financing is secured, the Partnership may utilize other debt and/or interest rate structures if it deems it prudent to do so. The Partnership completed five financing transactions in 2000. In February, the Partnership obtained $78.5 million of conventional mortgage financing at a fixed rate of 7.29% maturing in November 2010. In July, the Partnership obtained $26 million of conventional mortgage financing at a fixed rate of 7.5% maturing in August 2011. In October, the Partnership obtained $112.6 million of conventional mortgage financing at a fixed rate of 7.95% maturing in November 2011. In December, the Partnership obtained $21.7 million of conventional mortgage financing at a fixed rate of 7.88% maturing in July 2008. Also in December, the Partnership obtained an additional $11 million mortgage financing payable to The Irvine Company at a fixed rate of 7.81% maturing in August 2003. Proceeds from these five financings have been used for the repayment of matured conventional mortgages and to fund the construction of new apartment communities. All of these transactions are more fully discussed in Management's Discussion and Analysis included in this Annual Report on Form 10-K. 5 8 COMPETITION The Properties are located in developed areas. There are numerous other rental apartment properties within and around the market area of each property. The number of competitive rental properties in the area could have a material effect on the Partnership's ability to rent apartments and increase rents. EMPLOYEES Neither the Partnership nor the Trust has any employees. The Partnership is managed by IACLLC. The business and policy making functions of the Partnership are carried out by the directors, officers and employees of IACLLC. As of February 23, 2001, IACLLC had 58 employees. None of IACLLC's employees are subject to a collective bargaining agreement and IACLLC has experienced no labor-related work stoppages. IACLLC considers its relations with its personnel to be good. CYCLICALITY The Partnership's business, and the residential housing industry in general, are cyclical. The Partnership's operations and markets are affected by local and regional factors such as local economies, demographic demand for housing, population growth, property taxes, energy costs, and by national factors such as short and long-term interest rates, federal mortgage financing programs, federal income tax provisions and general economic trends. During 2000, the Partnerships' Stabilized Communities experienced only slight seasonal variation in occupancy. ENVIRONMENTAL MATTERS Under various federal, state and local laws, ordinances and regulations, an owner of real property may be held liable for the costs of removal or remediation of certain hazardous or toxic substances located on or in the property. These laws often impose such liability without regard to whether the owner knew of, or was responsible for, the presence of the hazardous or toxic substances. The costs of any required remediation or removal of such substances may be substantial. In addition, the owner's liability as to any property is generally not limited under such laws, ordinances and regulations and could exceed the value of the property and/or the aggregate assets of the owner. The presence of such substances, or the failure to remediate such substances properly, may also adversely affect the owner's ability to sell or rent the property or to borrow using the property as collateral. Under such laws, ordinances and regulations, an owner or any entity who arranges for the disposal of hazardous or toxic substances, such as asbestos, at a disposal facility may also be liable for the costs of any required remediation or removal of the hazardous or toxic substances at the facility, whether or not the facility is owned or operated by such owner or entity. In connection with the ownership of the Properties or the disposal of hazardous or toxic substances, the Partnership may be liable for such costs. The groundwater underlying portions of the City of Irvine generally contains elevated levels of certain inorganic compounds. In addition, two United States Marine Corps air bases where soil and groundwater contamination have been discovered are located adjacent to the Irvine Ranch. Although the Partnership believes, based on a site assessment report prepared for the U.S. Marine Corps, that contamination at one of these bases is localized, there can be no assurances that it has not migrated onto any of the Irvine Ranch properties. The other base is listed on the National Priorities List and activities from this base have resulted in groundwater contamination in the vicinity of this base. The Partnership has knowledge, based on information provided by the Orange County Water District, that contamination from this base has migrated into the groundwater underlying one of the Irvine Ranch Properties (containing 60 units). The Partnership believes that most of the contaminated groundwater is located at a substantial depth under the land surface. The Orange County Water District and the Irvine Ranch Water District, together with the Department of Defense, are currently conducting and will continue to conduct remediation activities at this base and in the area, including under the Partnership's property, to stabilize and ultimately remediate the contamination in the area, including the Partnership's property. Based on current information, the Partnership believes that it will not incur any remediation costs in connection with the groundwater contamination. 6 9 Other federal, state and local laws may impose liability for release of asbestos containing materials (ACMs) into the air or require the removal of damaged ACMs in the event of remodeling or renovation. There are ACMs at 11 of the Properties, primarily in floor coverings and acoustical ceiling materials. The Partnership believes that the ACMs at these properties are generally in good condition. Comprehensive operations and maintenance plans have been implemented for properties where ACMs are present. In addition, property custodial and maintenance workers are trained to deal effectively with the maintenance of existing ACMs. The Partnership believes it is in compliance in all material respects with all federal, state, and local laws relating to ACMs and that there are no regulatory requirements that currently require the removal of these ACMs; however, if the Partnership were required to remove all ACMs present in its properties over a short time frame, the cost of such removal would have a material adverse effect on its financial condition and results of operations. The Partnership also believes that ACMs are not present in the remaining Properties. The Irvine Ranch Water District, a municipal corporation, owns and maintains underground cement water pipes which contain asbestos and which are serving a number of the Properties. Since these pipes are owned and maintained by the Irvine Ranch Water District, the Partnership believes that any potential environmental liabilities associated with these pipes will be incurred by the Irvine Ranch Water District. All of the Partnership's properties fall under the jurisdiction of the Federal Clean Water Act. Under the Federal Clean Water Act, owners of construction sites are required to help prevent contaminates from entering into run-off systems that eventually enter sensitive waterways. Recently, jurisdictions in Orange County, California have interpreted the Federal Clean Water Act more stringently and are closely monitoring construction sites according to the stricter interpretation. Any construction site that is not in compliance with the requirements of the Federal Clean Water Act is at risk of being fined and/or of suspension of construction activity at the site. There are also similar requirements under the Federal Clean Water Act for operating properties. The Partnership believes that it is in compliance in all material respects with the stricter requirements. The Partnership will incur additional costs in order to remain in compliance with the Federal Clean Water Act; however, it does not believe such costs will be material. The Partnership has not been notified by any governmental authority of any material noncompliance, liability, or other claim in connection with any of the Properties. In addition, environmental assessments (which involve physical inspections without soil or groundwater analyses and generally without radon testing) were obtained on all Properties in 1993 or later except for two which were obtained more than seven years ago. The Partnership is not aware of any environmental liability relating to the Properties that it believes would have a material adverse effect on its business, assets or results of operations. Nevertheless, it is possible that the environmental assessments did not reveal all environmental liabilities with respect to the Properties, that environmental liabilities have developed with respect to the Properties since the environmental assessments were prepared or that there are material environmental liabilities of which the Partnership is unaware with respect to the Properties. Moreover, no assurance can be given that future laws, ordinances or regulations will not impose material environmental liabilities or that the current environmental condition of the Properties will not be affected by residents and occupants of the Properties or by the uses or condition of properties in the vicinity of the Properties, such as leaking underground storage tanks, or by third parties unrelated to the Partnership. REGULATION Apartment community properties are subject to various laws, ordinances and regulations, including regulations relating to recreational facilities such as swimming pools, activity centers and other common areas. The Partnership believes that each property has all material permits and approvals to operate its business. Rent control laws currently are not applicable to any of the Properties except 1221 Ocean Avenue. However, there can be no assurance that rent control requirements will not be initiated on additional communities in the future. The Properties must comply with Title II of the Americans with Disabilities Act (the "ADA") to the extent that such properties are "public accommodations" and/or "commercial facilities" as defined by the ADA. Compliance with the ADA requires removal of structural barriers to handicapped access in certain public areas of the Properties where such removal is "readily achievable." The ADA does not, however, 7 10 consider residential properties, such as apartment communities, to be public accommodations or commercial facilities, except to the extent portions of such facilities, such as a leasing office, are open to the public. The Partnership believes that the Properties comply in all material respects with all present requirements under the ADA and applicable state laws. Noncompliance with the ADA could result in imposition of fines or an award of damages to private litigants. The Fair Housing Act (the "FHA") requires, as part of the Fair Housing Amendments Act of 1988, apartment communities first occupied after March 13, 1990 to be accessible to the handicapped. Noncompliance with the FHA could result in the imposition of fines or an award of damages to private litigants. The Partnership believes that the Properties that are subject to the FHA are in compliance with such law. Approximately 2,800 units in portions of 33 of the Partnership's Stabilized Communities are currently subject to resident income limitations which generally restrict rental of the affected units to low or moderate income residents and which, in most instances, also limit the amount of rent that may be charged for a particular unit. A brief summary of the basis and effect of these resident income and other limitations follows: The development of 23 of the Stabilized Communities was financed with the proceeds of tax-exempt multifamily housing revenue bonds issued by various local municipalities. These bonds were refunded in May 1995 and consolidated under one issuer, California Statewide Communities Development Authority. Regulatory agreements applicable to such financings (a) require that a specified percentage of the units be set aside for residents whose incomes do not exceed a specified percentage of the area median income and (b) in most instances, limit the rent which can be charged to a percentage of the maximum qualifying resident income level for the affected unit. These bonds were refinanced in June 1998 by the same issuer. Most of the income restrictions on the new bonds will terminate upon the maturity date of the new bonds. Additionally, in October 1998, the Partnership purchased a 216-unit apartment community (One Park Place) for $28 million of which $18 million was the assumption of tax-exempt multifamily housing revenue bonds. In September 1999, the Partnership issued an additional $32 million of tax-exempt multifamily housing revenue bonds to finance the construction of two apartment buildings consisting of 201 units in a community adjacent to the One Park Place property. In addition to the rental restrictions imposed by the bond regulatory agreements, many of the 24 stabilized properties and four additional properties are also subject to resident income and rent limitations by virtue of development and other agreements entered into with local municipalities and private and quasi-public interest groups. These restrictions are similar in scope and substance but differ as to expiration dates from the other restrictions discussed above. Five of the Stabilized Communities were developed with the assistance of U.S. Department of Housing and Urban Development ("HUD") administered programs which provided mortgage insurance to the project lender. Certain regulatory and other agreements with HUD applicable to such financings (a) impose resident income restrictions similar to those imposed by the bond financing agreements, and (b) generally require the Partnership to operate the Properties in accordance with HUD's standards. With respect to one of the properties (The Parklands), a regulatory agreement additionally (a) limits the distribution of income from the property to 10% of the HUD imputed equity in the property and (b) requires that any income in excess of such 10% limit be deposited into a residual receipts account. Amounts paid into such residual receipts account have historically been used for capital improvements to the property, subject to HUD's consent. At the expiration of the applicable regulatory or other agreement, any amount remaining in such residual receipts account belongs to HUD. Under Section 8 of the United States Housing Act of 1937, HUD currently provides rental assistance payments to each of these five HUD properties pursuant to certain Housing Assistance Payments ("HAP") contracts. Under the HAP contracts, so long as the units are rented to residents whose income levels do not exceed specified HUD guidelines, each qualifying resident is required to pay only 30% of their adjusted monthly income as rent and HUD pays the difference between the 30% payment and the unit's market rents as established by HUD. The above-mentioned restrictions and limitations will continue for the remainder of each HAP contract term. Each HAP contract has an initial term of 20 years with four 5-year renewal options 8 11 exercisable at the owners option. At December 31, 2000, the average remaining term of the HAP contracts was approximately 2 years. Each of the resident and income restricted units within the Partnership's portfolio has been subject to one or more of the foregoing restrictions either since their initial occupancy or as a result of subsequent agreements with the applicable governmental authority or other private or quasi-public interest groups. Accordingly, the effect of these restrictions on rental income from the Properties has been reflected in the historical financial results of the Partnership. The Partnership believes that it is in material compliance with all of the foregoing requirements. The failure of the Partnership to comply with the terms of any of the foregoing could adversely affect the Partnership's operations. FACTORS RELATING TO REAL ESTATE OPERATIONS AND DEVELOPMENT General: Real property investments are subject to varying degrees of risk. The investment returns available from equity investments in real estate depend in large part on the amount of income earned and capital appreciation generated by the related properties as well as the expenses incurred. If the Properties do not generate revenue sufficient to meet operating expenses, including debt service and capital expenditures, the Partnership's income and ability to service its debt and other obligations and to make distributions to its partners/preferred security holders will be adversely affected. In addition, the Properties consist primarily of rental apartment communities geographically concentrated in Orange County. Income from and the performance of the Irvine Ranch Properties may therefore be adversely affected by the general economic climate in Orange County, including unemployment rates and local conditions such as the supply of and demand for apartments in the area, the attractiveness of the Irvine Ranch Properties to residents, zoning or other regulatory restrictions, competition from other available apartments and alternative forms of housing, the affordability of single family homes, the ability of the Partnership to provide adequate maintenance and insurance and the potential of increased operating costs (including real estate taxes). Certain significant expenditures associated with an investment in real estate (such as mortgage and other debt payments, real estate taxes and maintenance costs) generally are not reduced when circumstances cause a reduction in revenue from the investment. In addition, income from properties and real estate values are also affected by a variety of other factors, such as governmental regulations and applicable laws (including real estate, zoning and tax laws), interest rate levels and the availability of financing. The Irvine Ranch Properties in the aggregate historically have generated positive cash flow from operations; however, no assurance can be given that such will be the case in the future. The Partnership's "off-Ranch" development program was centered in Northern California's Silicon Valley and the northern coastal markets of San Diego County. In 1997, the Partnership acquired a 923-unit apartment community (The Villas of Renaissance) located in the La Jolla region of Northern San Diego County. In 1998, the Partnership completed construction of a 342-unit apartment community (The Hamptons at Cupertino) in the Silicon Valley and began development and construction on three additional apartment communities (with a total of approximately 660 units) in the Silicon Valley and two additional apartment communities (with a total of approximately 570 units) in Northern San Diego County. Also in 1998, the Partnership purchased a 120-unit, high-rise apartment building under renovation located in Santa Monica (1221 Ocean Avenue). During 1999, a 336-unit apartment community in Northern San Diego County (Arcadia at Stonecrest) was completed and achieved stabilization. In addition, the renovations at 1221 Ocean Avenue were completed and the apartment building was in lease-up at December 31, 2000. During 2000, a 155-unit apartment community in Northern California (The Villas at Bair Island Marina) was completed and achieved stabilization. Also in 2000, a 232-unit apartment community in San Diego County (La Jolla Palms) began lease-up and was 73% occupied as of December 31, 2000. The two remaining off-Ranch projects, Cherry Orchard Apartments and Franklin Street, both of which are located in Northern California, were under development at December 31, 2000. The Partnership has no plans to expand its off-Ranch portfolio beyond these eight properties. The development, construction and operation of rental apartment communities in such new markets may present risks different than or in addition to the risks discussed above related to the Irvine Ranch Properties which are located entirely in Orange County. For jurisdictions off the Irvine Ranch, 9 12 local jurisdiction approvals with respect to entitlements may impose requirements and conditions different from those applicable to the Irvine Ranch. No assurance can be given that any of the "off-Ranch" apartment communities will be successful. Equity real estate investments, such as the investments made by the Partnership in the Properties, are relatively illiquid. Such illiquidity limits the ability of the Partnership to vary its portfolio in response to changes in economic or other conditions. The Properties are subject to all operating risks common to apartment ownership in general. Such risks include: the Partnership's ability to rent units at the Properties, including the 2,084 units in the Communities Under Development; competition from other apartment communities; excessive building of comparable properties which might adversely affect apartment occupancy or rental rates; increases in operating costs due to inflation and other factors which may not necessarily be offset by increased rents; increased affordable housing requirements that might adversely affect rental rates; inability or unwillingness of residents to pay rent increases; and future enactment of rent control laws or other laws regulating apartment housing, including present and possible future laws relating to access by disabled persons. If operating expenses increase, the local rental market may limit the extent to which rents may be increased to meet increased expenses without decreasing occupancy rates. If any of the above occurred, the Partnership's ability to meet its debt service and other obligations and to make distributions with respect to its partners/preferred security holders could be adversely affected. Real Estate Development: A primary focus of the Partnership is the development of the Communities Under Development. The real estate development business involves significant risks in addition to those involved in the ownership and operation of established apartment communities, including the risks that specific project approvals may take more time and resources to obtain than expected, that construction may not be completed on schedule or budget and that the properties may not achieve anticipated rent or occupancy levels. In addition, if long-term debt is not available on acceptable terms to finance such development, cash available for debt service and other obligations might be adversely affected. Insurance: The Partnership carries comprehensive liability, fire, extended coverage and rental loss insurance covering all of the Properties, with policy specifications and insured limits which the Partnership believes are adequate and appropriate under the circumstances. In addition, The Irvine Company has a limited earthquake insurance policy covering all of its properties, including the Properties of the Partnership. There are, however, certain types of losses that are not generally insured because they are either uninsurable or not economically insurable. Should an uninsured loss or a loss in excess of insured limits occur, the Partnership could lose its capital invested in the property, as well as the anticipated future revenues from the property, and, in the case of debt which is recourse to the Partnership, would remain obligated for any mortgage debt or other financial obligations related to the property. Any such loss would adversely affect the Partnership. The Partnership believes that the Properties are adequately insured. In addition, in light of the California earthquake risk, California building codes since the early 1970's have established construction standards for all newly built and renovated buildings, including apartment buildings. A major code change was adopted in 1984, implementing the most strict construction standards as of such time. Forty-one of the existing 60 Stabilized Communities (representing approximately 73% of the units in the Stabilized Communities) have been completed and occupied since January 1, 1985, and the Partnership believes that all of the Stabilized Communities were constructed in full compliance with the applicable standards existing at the time of construction. In 1999, there was another major code change and more rigorous construction standards were adopted. The Partnership is currently constructing the Communities Under Development in full compliance with these stricter standards. While earthquakes have occurred from time to time in California, the Partnership has not experienced any material losses as a result of earthquakes. No assurance can be given that this will be the case in the future. 10 13 ITEM 2. PROPERTIES The Partnership owns Stabilized Communities containing 17,397 apartment units and had five Communities Under Development. Below is 2000 operating information for the Stabilized Communities:

11 14

--------------- (1) Represents amounts from initial stabilization date. The Properties are located within the following jurisdictions in California:

The unit mix of the Properties is as follows:

The consolidated real estate and accumulated depreciation schedule of the Partnership is included on pages F-16 through F-18 of this Annual Report on Form 10-K. The Partnership believes that the Properties are well maintained and have no material deferred maintenance requirements or current need for major renovations. The average age of the Stabilized Communities is approximately 12 years. The oldest of the Stabilized Communities was completed in 1969, and 41 of the 60 Stabilized Communities, totaling 12,729 units or approximately 73% of the Stabilized 12 15 Communities, have been completed since January 1, 1985. The number of units per property ranges from 58 units to 923 units, with an average of approximately 290 units. The Partnership seeks to assure that the Properties remain attractive dwellings for apartment residents and desired locations for prospective apartment residents. Maintenance, custodial and groundskeeping personnel perform regular maintenance and upkeep on the Properties to preserve and enhance physical and aesthetic attributes. The physical appearance of and apartment residents' satisfaction with the Properties and with the performance of the local property managers is monitored and evaluated on an on-going basis by the Partnership's senior management. All of the Stabilized Communities provide, and the Communities Under Development will provide, residents with numerous amenities and include extensive landscaping. Approximately 88% of the 60 Stabilized Communities contain swimming pools, spas, air conditioning and covered parking. Additional amenities may include a fitness center, business center, recreational room and children play areas. Each apartment unit includes a patio, deck or balcony. Many apartment units offer one or more of certain additional features, such as fireplaces, enclosed garages, refrigerators, washers and dryers, and microwave ovens. Additionally, all properties completed after 1994 include an alarm system, offer high-speed Internet access and are located within a gated community. The Communities Under Development contain most of these amenities. ITEM 3. LEGAL PROCEEDINGS Neither the Partnership nor the Trust or the Properties is currently subject to any material litigation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 13 16 PART II ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS IRVINE APARTMENT COMMUNITIES, L.P. There is no established public trading market for the Partnership's common partnership interests. As of February 23, 2001, there were two holders of common partnership interests. The Partnership made aggregate distributions of $124,455,000 during 2000 on its common partnership interests. There were no issuances of common partnership interests in the Partnership during the fourth quarter of 2000. IAC CAPITAL TRUST There were no issuances of securities of the Trust during the fourth quarter of 2000. 14 17 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial data and other operating information of the Partnership and the Trust. The selected financial data in the table are derived from the consolidated financial statements of the Partnership and the Trust. The data should be read in conjunction with the consolidated financial statements, related notes, and other financial information included herein.

--------------- (1) A property is typically considered stabilized at the earlier of one year after completion of construction or when it achieves 95% occupancy. (2) Average physical occupancy is calculated by dividing the total occupied units in the stabilized properties on a weekly basis by the total units in the stabilized properties on a weekly basis. (3) Average monthly rent per unit is calculated by dividing average rental revenue per unit by average economic occupancy. 15 18 ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Selected Financial Data, the Consolidated Financial Statements of the Partnership and the Trust and the Notes thereto. RESULTS OF OPERATIONS The Partnership's income before extraordinary item and redeemable preferred interests was $84.5 million in 2000, down from $85.7 million in 1999, and up from $73.5 million in 1998. Although the Partnership's net operating income (rental and other income less property expenses and real estate taxes) increased from $177.2 million in 1999 to $201.4 million in 2000, the Partnership's overall financial results declined in 2000 from 1999. The decline in 2000 is due to the increase in interest expense related to the additional mortgage financings and tax-exempt mortgage bond financings obtained in 2000 and 1999, combined with a decrease in capitalized interest due to the decrease in the average qualifying asset balance for projects under development. The decrease was also due to the increase in depreciation and amortization expense due to additional depreciation related to the step-up in basis recorded in conjunction with the Merger and the addition of newly delivered rental units. The decrease was offset, in part, by contributions of newly delivered rental units from its development program and properties that stabilized during 1999 and 2000, as well as an increase in rental rates and physical occupancy within its stabilized portfolio during 2000 and a decrease in general and administrative expenses. The Partnership's financial results improved in 1999 due to the contribution of newly delivered rental units from its development program, properties that stabilized during 1999 and 1998 and an acquisition in 1998, as well as an increase in rental rates and physical occupancy within its stabilized portfolio. REVENUE AND EXPENSE DATA

Operating revenues (rental and other income) increased by 15.4% to $289.7 million in 2000, up from $251.0 million in 1999. Operating revenues in 1999 had increased by 14.4% from $219.4 million in 1998. Operating revenues rose in 2000 because of higher rental rates, higher physical occupancy and a larger average number of rental units in service, primarily as a result of new development. Operating revenues rose in 1999 because of higher rental rates, higher physical occupancy, and a larger average number of rental units in service, primarily as a result of new development and an acquisition in 1998. Property expenses increased by 23.7% to $67.1 million in 2000 from $54.2 million in 1999, which had increased from $49.4 million in 1998. The 2000 increase reflects incremental expenses from newly delivered rental units and communities stabilized during 1999 and 2000. The 1999 increase reflects incremental expenses from newly delivered and acquired rental units and communities stabilized during 1999 and 1998. To improve operating efficiency and reduce operating costs, the Partnership formed IAMC to manage the Partnership's properties in April 1998. Accordingly, the personnel and office costs of IAMC are included in property expenses. Real estate taxes totaled $21.3 million in 2000, $19.5 million in 1999 and $17.2 million in 1998. Real estate taxes increased in 2000 and 1999 primarily due to the addition of new rental units through development and acquisition. Net interest expense increased to $54.7 million in 2000 from $35.7 million in 1999, which had increased from $29.8 million in 1998. Total interest incurred was $60.9 million in 2000 compared with $50.1 million in 16 19 1999 and $42.1 million in 1998. The increase in interest incurred in 2000 was primarily due to the additional mortgage financings and tax-exempt mortgage bond financings in 2000 and 1999, partially offset by the repayment of certain conventional mortgages in 2000 and the unsecured term loan in 1999. The increase in interest incurred in 1999 was primarily due to the conventional mortgage financings and the unsecured term loan that was outstanding for almost the entire year. Net interest expense increased in 2000 due to a decrease in capitalized interest during 2000 as a result of a lower average qualifying asset balance for projects under development. Net interest expense increased in 1999 due to a decreased level of development, resulting in a lower level of capitalized interest, in proportion to the increase in interest incurred. The Partnership capitalizes interest on projects actively under development using qualifying asset balances and applicable weighted average interest rates. Capitalized interest totaled $6.2 million in 2000, $14.4 million in 1999 and $12.3 million in 1998. Interest income totaled $4.4 million in 2000, $2.4 million in 1999 and $1.5 million in 1998. The changes in interest income reflect changes in the Partnership's average cash balances. Depreciation and amortization expense increased to $56.6 million in 2000, up from $44.4 million in 1999. These expenses had increased in 1999 from $33.8 million in 1998. The increases in both years reflect the completion and delivery of newly developed rental units. In addition, the 2000 and 1999 amounts reflect twelve and seven months, respectively, of depreciation related to the step-up in basis recorded in conjunction with the Merger. General and administrative expense decreased to $10.0 million in 2000, down from $13.9 million in 1999. These expenses had increased in 1999 from $9.4 million in 1998. The decrease in 2000 was the result of additional costs incurred associated with the Merger and the write-off of certain abandoned costs, both in the second quarter of 1999. Accordingly, the increase in 1999 was the result of payments of vested stock options in conjunction with the Merger, increased salary expenses due to personnel changes and the write-off of certain abandoned costs. LIQUIDITY AND CAPITAL RESOURCES The Partnership believes that cash provided by operations will be adequate to meet ongoing operating requirements, debt service payments and payment of distributions by the Partnership to the preferred limited partners in both the short and long term. Liquidity: The Partnership expects to meet its short-term and long-term liquidity requirements, such as construction costs and scheduled debt maturities, through the refinancing of long-term debt or borrowings from financial institutions. The Partnership's $125 million unsecured revolving credit facility was terminated as of December 27, 2000. Shelf Registration Statements: On May 14, 1997, the Partnership filed a shelf registration statement with the Securities and Exchange Commission providing for the issuance from time to time of up to $350 million of debt securities. On October 1, 1997, the Partnership issued $100 million aggregate principal amount of 7% senior unsecured notes pursuant to its shelf registration statement. In June 1999, the Partnership cancelled the remaining availability of $250 million under the shelf registration statement, including the Prospectus Supplement dated April 9, 1998 filed for the future issuance of Medium-Term Notes. The Partnership no longer plans to issue additional securities under the shelf registration statement. Preferred Interests: In January 1998, the Trust issued 6.0 million of its 8 1/4% Series A Preferred Securities. The proceeds of $150 million were used to purchase an equivalent amount of 8 1/4% Series A Preferred Limited Partner Units in the Partnership. The Partnership used the $150 million of proceeds, net of costs and expenses, all of which were paid by the Partnership, to repay outstanding borrowings under the credit facility and to fund development and an acquisition. In November 1998, the Partnership issued 2.0 million of 8 3/4% Series B Preferred Limited Partner Units. The Partnership used the net proceeds to reduce the outstanding balance on its unsecured line of credit. Debt: The Partnership's conventional debt bears interest at fixed interest rates. Interest rates on conventional mortgage debt were reduced to then-current market rates at the time of IAC, Inc.'s December 17 20 1993 initial public offering through interest rate buy-down agreements that are scheduled to expire at various dates prior to loan maturity that range from 2002 to 2008. The weighted average effective interest rate on the Partnership's debt, including the non-cash charges of amortization of deferred financing costs, was 6.57% at December 31, 2000. In February 2000, the Partnership obtained $78.5 million of conventional mortgage financing at a fixed rate of 7.29% maturing in November 2010. In July 2000, the Partnership obtained $26 million of conventional mortgage financing at a fixed rate of 7.5% maturing in August 2011. In October 2000, the Partnership obtained $112.6 million of conventional mortgage financing at a fixed rate of 7.95% maturing in November 2011. In December 2000, the Partnership obtained $21.7 million of conventional mortgage financing at a fixed rate of 7.88% maturing in July 2008. Also in December 2000, the Partnership obtained an additional $11 million mortgage note payable to The Irvine Company at a fixed rate of 7.81% maturing in August 2003. Proceeds from these five financings have been used for the repayment of matured conventional mortgages and to fund the construction of new apartment communities. DEBT STRUCTURE

Operating Activities: Cash provided by operating activities was $153.5 million, $140.8 million and $83.8 million for 2000, 1999 and 1998, respectively. Cash provided by operating activities increased in 2000 compared to 1999 due to higher revenues from newly delivered rental units from the Partnership's development program and properties stabilized during 2000 and 1999, as well as an increase in rental rates and physical occupancy within its stabilized portfolio. Investing Activities: Cash used in investing activities was $133.0 million, $152.9 million and $231.7 million in 2000, 1999 and 1998, respectively. Changes in the amount of cash used in investing activities in each year reflect changing levels of real estate development and acquisitions in 2000, 1999 and 1998. Real estate development and acquisitions are typically funded by mortgage financing (see "Financing Activities" and "Capital Expenditures"). Financing Activities: Cash provided by financing activities was $63.1 million, $21.0 million and $148.2 million in 2000, 1999 and 1998, respectively. The Partnership received a total of $238.8 million during 2000 from conventional mortgage financings and $11 million from additional mortgage notes payable to The Irvine Company. The proceeds from these financings were used to fund construction of new apartment communities and repay certain conventional mortgages. The Partnership received $8.3 million during 1999 from a tax-exempt mortgage bond financing, $115 million in September 1999 from a conventional mortgage financing and $70 million in October 1999 from a conventional mortgage financing. The proceeds from these financings were used to fund construction of new apartment communities, to repay the advances from affiliate and to repay an unsecured term loan, which was repaid in November 1999. The Partnership received net proceeds of $192.7 million from the sale of preferred limited partner units in January and November of 1998, a 18 21 portion of which was used to pay down the Partnership's line of credit. Additionally, the Partnership received a $100 million unsecured term loan in 1998 with which it paid down the line of credit. Additionally, the Partnership paid $141.2 million in distributions to partners and redeemable preferred interest holders in 2000 compared to $66.6 million in 1999 and $80.7 million in 1998. CAPITAL EXPENDITURES Capital expenditures consist of capital improvements and investments in real estate assets. Capital improvements to operating real estate assets totaled $2.3 million, $6.5 million and $5.9 million in 2000, 1999 and 1998, respectively. Capital investments in real estate assets totaled $131 million, $146 million and $226 million in 2000, 1999 and 1998, respectively, and consisted of capital investments in new developments, capital replacements, acquisitions of apartment communities and land purchases. Capital Improvements: The Partnership has a policy of capitalizing expenditures related to new assets, the material enhancement of the value of an existing asset, or the substantial extension of an existing asset's useful life. Capital Replacements: Capital replacements consist of special programs to upgrade and enhance a community to achieve higher rental rates. Expenditures for capital replacements totaled $4.8 million in 2000. These expenditures were made at five properties: Promontory Point, Turtle Rock Vista, Rancho San Joaquin, Park West and Woodbridge Willows. Capital Investments in New Development: Currently, the Partnership has three apartment communities under development or construction that are expected to require total expenditures of approximately $402 million, of which $187 million had been incurred at December 31, 2000. Funding for these developments is expected to come from borrowings from financial institutions and refinancing of long-term debt. (See Item 13 and Note 7 of the Notes to Consolidated Financial Statements). CONSTRUCTION INFORMATION

--------------- (1) As of December 31, 2000, 192 units were delivered and 176 units were occupied. The estimated costs of apartment communities that are in development are only estimates. Actual results will depend on numerous factors, many of which are beyond the control of the Partnership. These include the extent and timing of economic growth in the Partnership's rental markets; future trends in the pricing of construction materials and labor; product design changes; entitlement decisions by local government authorities; weather patterns; changes in interest rate levels; and other changes in capital markets. No assurance can be given that the estimates set forth in the foregoing table will not vary substantially from actual results. IMPACT OF INFLATION The Partnership's business is affected by general economic conditions, including the impact of inflation and interest rates. Substantially all of the Partnership's leases allow, at time of renewal, for adjustments in the rent payable thereunder, and thus may enable the Partnership to seek increases in rents. Substantially all leases are for a period of one year or less. The short-term nature of these leases generally serves to minimize 19 22 the risk to the Partnership of the adverse effects of inflation. For construction, the Partnership has entered into various contracts for the development and construction of new apartment communities. These are fixed-fee contracts and thus partially insulate the Partnership from inflationary risk. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Partnership's exposure to market risk for changes in interest rates relates primarily to the Partnership's current and future debt obligations. The Partnership's philosophy is to maintain a fairly low tolerance to interest rate fluctuation risk. The Partnership is still vulnerable, however, to significant fluctuations of interest rates on its variable rate debt, repricing on its fixed rate debt at various points in the future and future debt. The Partnership has managed and will continue to manage interest rate risk by maintaining a ratio of fixed rate long-term debt to total debt such that variable rate exposure is kept at an acceptable level and taking advantage of favorable market conditions for long-term debt. The following table provides information about the Partnership's financial instruments that are sensitive to changes in interest rates. For debt obligations, the table presents principal cash flows and related weighted- average interest rates by expected maturity dates. INTEREST RATE SENSITIVITY PRINCIPAL (NOTIONAL) AMOUNT BY EXPECTED MATURITY

--------------- (1) The average interest rate is a weekly remarketed tax-exempt based rate. The weighted average interest rate as of December 31, 2000 was 5.16%. (2) $4,777 of debt is fixed at 6.29% and $15,737 is variable at the daily remarketed tax-exempt based rate. The weighted average variable interest rate was 4.75% as of December 31, 2000. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and related reports of independent auditors listed in the accompanying index are filed as part of this report. See "Index to Financial Statements" on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 20 23 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS The Partnership does not have any directors or officers. The Partnership is managed by its sole general partner, IACLLC. The business and policy making functions are carried out through the directors of IACLLC and through those employees at IACLLC listed below under the caption "Executive Officers of Irvine Apartment Communities, L.P." BOARD OF DIRECTORS OF IRVINE APARTMENT COMMUNITIES LLC The following sets forth certain information regarding the Board of Directors of IACLLC as of February 23, 2001: DONALD BREN, 68. Mr. Bren has been Chairman of the Board of IACLLC since its formation. Mr. Bren has been Chairman of the Board of The Irvine Company since 1983. Mr. Bren is a member of the Board of Overseers of the University of California, Irvine, and is a member of the Board of Trustees of the California Institute of Technology, the Los Angeles County Museum of Art and the Orange County Museum of Art. MICHAEL D. MCKEE, 55. Mr. McKee has been a Director of IACLLC since its formation. Mr. McKee is Vice Chairman and Chief Financial Officer of The Irvine Company. Previously, Mr. McKee was Executive Vice President, Chief Financial Officer and Secretary of The Irvine Company since January 1997 and was Executive Vice President, Chief Legal Officer and Secretary of The Irvine Company from April 1994 to December 1996. Prior to joining The Irvine Company, Mr. McKee was the managing partner of the Orange County office of Latham & Watkins, an international law firm with which he was associated since 1979. Mr. McKee is a member of the Board of Directors of Mandalay Resort Group, Health Care Property Investors, Inc. and Realty Income Corporation. RICHARD G. SIM, 64. Mr. Sim has been a Director of IACLLC since its formation. Mr. Sim is Chairman of the Investment Properties Group. Previously, Mr. Sim was Executive Vice President, Investment Properties Group for The Irvine Company since 1992. Mr. Sim joined The Irvine Company in 1981 and has been a member of the Board of Directors of The Irvine Company since 1993. Mr. Sim is a member of the Board of Directors of the University of California, Irvine ("UCI") Foundation and is a past Chairman of UCI's CEO Roundtable. RAYMOND L. WATSON, 74. Mr. Watson has been a Director of IACLLC since its formation. Mr. Watson has been Vice Chairman of the Board of The Irvine Company since 1986. From 1973 to 1977, Mr. Watson was President and Chief Executive Officer of The Irvine Company and he has been a member of the Executive Committee of the Board of Directors of The Irvine Company since 1983. Mr. Watson is a member of the Board of Directors of The Walt Disney Company, where he is also Chairman of the Executive Committee. 21 24 EXECUTIVE OFFICERS OF IRVINE APARTMENT COMMUNITIES, L.P. The Partnership is managed by its sole general partner, IACLLC. The executive officers of IACLLC listed below perform policy making functions for the Partnership. The following sets forth certain information regarding such individuals as of February 23, 2001 and other positions held by them over the last five years:

ITEM 11. EXECUTIVE COMPENSATION IRVINE APARTMENT COMMUNITIES, L.P. The Partnership does not have any employees. The Partnership is managed by its sole general partner, IACLLC. The executive officers of IACLLC who perform policy making functions for the Partnership are compensated for such services as employees of IACLLC. COMPENSATION OF DIRECTORS Neither IACLLC nor the Partnership pays any of the members of the Board for their services as directors. IAC CAPITAL TRUST The Trust does not have any directors or officers. The Trust is managed by IACLLC. Information with respect to the Trust required under Part III (Items 10, 11, 12 and 13) is included as described in this Part III. All of such information is equally applicable to the Trust as to the Partnership. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires the Trust's Regular Trustee and beneficial owners of more than 10% of the Series A Preferred Securities of the Trust, to file initial reports of ownership and reports of changes in ownership with the SEC and the NYSE. Such persons are required by SEC regulations to furnish the Trust with copies of all Section 16(a) forms they file. Based solely on a review of the copies of such forms furnished to the Trust, the Trust noted that no individual who, at any time during 2000, was a Regular Trustee or beneficial owner of more than 10% of the Series A Preferred Securities of the Trust failed to file the reports required by Section 16(a) of the Exchange Act on a timely basis. Mr. Bren filed a late Form 4 on August 11, 2000, reporting the following transactions: (i) the acquisition by a trust for which Mr. Bren is trustee of 273,996 shares of the Series A Preferred Securities of the Trust in seven transactions from September 14, 1999 to November 17, 1999; (ii) a sale by the trust for which Mr. Bren is trustee of 5,500 shares of the Series A Preferred Securities of the Trust on April 5, 2000; and (iii) the acquisition by Mr. Bren's spouse of 5,000 shares of the Series A Preferred Securities of the Trust on October 28, 1999. 22 25 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT IACLLC, the sole general partner of the Partnership, owns all of the outstanding units of general partnership interest of the Partnership. Mr. Bren is the sole shareholder and Chairman of the Board of Directors of The Irvine Company, which owns all of the outstanding common limited partnership units of the Partnership and all of the outstanding membership interests in IACLLC, and therefore may be deemed to have beneficial ownership of the general and limited partnership units of the Partnership owned by IACLLC and The Irvine Company. Mr. Bren disclaims such beneficial ownership. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS TRANSACTIONS WITH THE IRVINE COMPANY On June 7, 1999, IAC, Inc. was merged with and into IACLLC. As a result of the Merger and a related transaction in which The Irvine Company acquired an additional 74,523 common limited partnership units, The Irvine Company beneficially owns and controls all of the outstanding common partnership units in the Partnership and IACLLC has become the sole general partner of the Partnership. At December 31, 2000, IACLLC had a 44.6% general partnership interest and The Irvine Company had a 55.4% common limited partnership interest in the Partnership. In conjunction with the Merger, the Partnership and The Irvine Company entered into a separate agreement whereby The Irvine Company agreed to fund certain construction cost overruns and net operating income shortfalls of the Partnership in connection with the development and operation of nine apartment projects which were under development at the time of the Merger. The Irvine Company is obligated to contribute to the Partnership an amount equal to the difference between the total costs incurred by the Partnership to complete the construction of the respective apartment project and the amount of the approved budget for such construction. There were no contributions for construction cost overruns made during 2000. In addition, The Irvine Company is obligated to contribute to the Partnership an amount equal to the difference between the approved budgeted pro forma stabilized net operating income of the respective apartment project and the net operating income earned by the Partnership from the operation of such property for a period of time not to exceed two years after the completion of such property. There were no contributions for net operating income shortfalls made during 2000. Included in general and administrative expenses are charges from The Irvine Company pursuant to an administrative service agreement covering services for information technology and other services totaling $318,000 for the year ended December 31, 2000. The Irvine Company and the Partnership jointly purchase employee health care insurance and property and casualty insurance. In addition, the Partnership incurred rent totaling $560,000 for the year ended December 31, 2000 related to leases with The Irvine Company that expire in 2003. IAMC incurred rent totaling $301,000 for the year ended December 31, 2000 related to a lease with The Irvine Company. The Partnership reimburses IACLLC for substantially all of its costs incurred in operating the Partnership, including the compensation of each of the employees of IACLLC who perform services for the Partnership. The aggregate amount paid by the Partnership to IACLLC for such costs was $12.6 million in 2000. The aggregate amount incurred by the Partnership for such costs was $11.9 million in 2000. Included in accounts payable and accrued liabilities at December 31, 2000 is $1.2 million due to The Irvine Company. The amount represents a payable to The Irvine Company for the payment of a $2 million option related to one of the Partnership's properties and unpaid interest and information technology costs, net of amounts owed to the Partnership for general and administrative costs and other expenses incurred by the Partnership on behalf of The Irvine Company. Included in other assets at December 31, 2000 is approximately $11.2 million due from The Irvine Company. The amount represents a receivable of the Partnership for property taxes, general and administrative costs and development costs incurred by the Partnership on behalf of The Irvine Company. 23 26 Throughout 2000, The Irvine Company advanced to the Partnership amounts totaling $41.5 million. All advances during 2000 accrued interest at 5.75% and were repaid by the end of 2000. For the year ending December 31, 2000, the Partnership incurred approximately $572,000 of interest costs related to the advances. In October 2000, the Partnership and The Irvine Company entered into a Loan Agreement whereby the Partnership is the lender and The Irvine Company is the borrower. Borrowings under the Loan Agreement shall bear interest at a variable or fixed rate to be quoted by the Partnership, however, the rate shall not be lower than the applicable federal rate or the rate at which interest is paid to the Partnership on its overnight cash investments. The Irvine Company shall make monthly interest payments on each borrowing until the principal is repaid. The Loan Agreement expires in June 2003. As of December 31, 2000, there were no borrowings under the Loan Agreement. Two of the Partnership's apartment communities are financed by mortgage notes payable to The Irvine Company. These mortgage notes totaled $58.6 million at December 31, 2000. The mortgage notes are collateralized by all-inclusive trust deeds on each of the apartment communities financed. They bore a weighted average fixed interest rate of 6.14% at December 31, 2000, are fully amortizing and mature between 2003 and 2024. Interest incurred on the mortgage notes payable to The Irvine Company totaled $2.8 million for the year ended December 31, 2000. The mortgage notes payable to The Irvine Company "wrap around" secured first trust deed notes payable to third-party financial institutions. The secured first trust deed notes totaled $59.2 million as of December 31, 2000. The Partnership had a $125 million unsecured revolving credit facility that was amended in June 1999. The amended credit facility bore interest at LIBOR plus 0.65% or prime and was to mature in June 2001. The credit facility was terminated as of December 27, 2000. The Partnership had entered into letters of credit under the credit facility. In conjunction with the termination of the credit facility, the letters of credit under the credit facility were transferred to the credit facility of The Irvine Company. The Partnership continues to pay all fees related to the letters of credit transferred to The Irvine Company, as such letters of credit remain outstanding to secure obligations of the Partnership. 24 27 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1 and 2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES The financial statements and financial statement schedules listed in the Index to Financial Statements on Page F-1 of this report are filed as part of this report. (a)(3) EXHIBITS The Exhibit Index is included on pages 26 through 28 of this report. 25 28 INDEX TO EXHIBITS

26 29

(b) REPORTS ON FORM 8-K The Partnership did not file any reports on Form 8-K during the fourth quarter of 2000. The Trust did not file any reports on Form 8-K during the fourth quarter of 2000. 27 30 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrants have duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. IRVINE APARTMENT COMMUNITIES, L.P. By: Irvine Apartment Communities LLC its sole general partner Date: March 26, 2001 By: /s/ MICHAEL D. MCKEE ----------------------------------- Michael D. McKee Vice Chairman, Chief Financial Officer and Secretary IAC CAPITAL TRUST Date: March 26, 2001 By: /s/ DAVID A. PATTY ------------------------------------ David A. Patty Regular Trustee The undersigned hereby constitute and appoint Michael D. McKee and David A. Patty, and each of them, their true and lawful attorneys-in-fact and agents, with full powers of substitution and resubstitution, for them and in their names, places and steads, in any and all capacities, to sign the Annual Report on Form 10-K of Irvine Apartment Communities, L.P. and of IAC Capital Trust for the fiscal year ending December 31, 2000 and all amendments to such Annual Report on Form 10-K, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform to all intents and purposes as they might or could do in person, hereby ratifying all that said attorneys-in-fact and agents, each acting alone, or their substitutes, may lawfully do or cause to be done by virtue thereof.

28 31 IRVINE APARTMENT COMMUNITIES, L.P. IAC CAPITAL TRUST INDEX TO FINANCIAL STATEMENTS

F-1 32 IRVINE APARTMENT COMMUNITIES, L.P. CONSOLIDATED BALANCE SHEETS

See accompanying notes. F-2 33 IRVINE APARTMENT COMMUNITIES, L.P. CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes. F-3 34 IRVINE APARTMENT COMMUNITIES, L.P. CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL

See accompanying notes. F-4 35 IRVINE APARTMENT COMMUNITIES, L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes. F-5 36 IRVINE APARTMENT COMMUNITIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION Irvine Apartment Communities, L.P. (the "Partnership"), a Delaware limited partnership, was formed on November 15, 1993. In connection with an initial public offering of common shares on December 8, 1993, Irvine Apartment Communities, Inc. ("IAC, Inc.") obtained a general partnership interest in and became the sole managing general partner of the Partnership. The Irvine Company transferred 42 apartment communities and a 99% interest in a limited partnership which owns one apartment community to the Partnership. On June 7, 1999, IAC, Inc. was merged with and into TIC Acquisition LLC (the "Acquiror"), a Delaware limited liability company indirectly wholly owned by The Irvine Company (the "Merger"), with the Acquiror remaining as the surviving entity and renamed Irvine Apartment Communities LLC ("IACLLC"). As a result of the Merger and a related transaction in which The Irvine Company acquired an additional 74,523 common limited partnership units, The Irvine Company beneficially owns and controls all of the outstanding common partnership units in the Partnership and IACLLC has become the sole general partner of the Partnership. The Partnership's management and operating decisions are under the unilateral control of IACLLC. All management powers over the business and affairs of the Partnership are vested exclusively in IACLLC. At December 31, 2000, IACLLC had a 44.6% general partnership interest in the Partnership and The Irvine Company had a 55.4% common limited partnership interest in the Partnership. The Partnership owns, operates and develops apartment communities in Orange County, California and, since 1997, other locations in California. As of December 31, 2000, the Partnership owned 65 apartment communities representing 17,941 operating apartment units and 1,540 apartment units under construction or development (collectively, the "Properties"). In March 1998, the Partnership and Western National Property Management ("WNPM") announced the formation of a strategic alliance that, in April 1998, assumed all property management responsibilities for the Partnership's Southern California portfolio. Effective January 1, 1999, the property management responsibilities of the new entity, Irvine Apartment Management Company ("IAMC"), were expanded to include the Partnership's entire portfolio. On January 1, 2000, the partnership agreement of IAMC was amended and restated whereby IAMC is owned 75% by the Partnership and 25% by WNPM. IAC Capital Trust (the "Trust"), a Delaware business trust, was formed on October 31, 1997. The Trust is a limited purpose financing vehicle established by the Partnership. The Trust exists for the sole purpose of issuing redeemable preferred securities and investing the proceeds thereof in preferred limited partner units of the Partnership. Profits and losses of the Partnership are generally allocated to the general partner and the common limited partner based on their respective ownership interests in the Partnership. The holders of the Series A redeemable preferred limited partner units and redeemable preferred securities are entitled to distributions/dividends at an annual rate of 8 1/4% of the stated value per unit/security. The stated value of each unit/security is $25. The holders of the Series B redeemable preferred limited partner units are entitled to distributions at an annual rate of 8 3/4% of the stated value per unit. The stated value of each unit is $25. The accompanying financial statements include the consolidated accounts of the Partnership and its financially controlled subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Prior to the Merger, all costs incurred by IAC, Inc. relating to the ownership of interests in and operation of the Partnership, including the compensation of its officers and employees, stock incentive plans, director fees and the costs and expenses of being a public company, were reimbursed by the Partnership. The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of December 31, 2000 and 1999, and the revenues and expenses for the three years ended December 31, 2000. Actual results could differ from those estimates. F-6 37 IRVINE APARTMENT COMMUNITIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Real Estate Assets and Depreciation: Real estate assets, which are held as long-term investments, are stated at cost less accumulated depreciation. Impairment losses on long-lived assets used in operations are recorded when events and circumstances indicate that the assets, on a property-by-property basis, are impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts. As of December 31, 2000, no impairment losses have been recorded. Land and infrastructure costs are allocated to properties based on relative fair value. Costs related to the development and construction of properties are capitalized as incurred. Interest and property taxes are capitalized to apartment communities which are under active development. When a building within a community under construction is completed and held available for occupancy, the related costs are expensed. Repair and maintenance expenditures are expensed as incurred. Major replacements and betterments are capitalized and depreciated over their useful lives. Depreciation is computed on a straight-line basis over the useful lives of the properties (principally forty years for buildings; twenty years for siding, roofs and balconies; fifteen years for plumbing and air conditioning equipment; ten years for pools, tennis courts, parking lots and driveways; and five to ten years for furniture and fixtures). Cash and Cash Equivalents: The Partnership considers all highly liquid investments with a remaining original maturity when purchased of three months or less to be cash equivalents. Restricted Cash: Restricted cash is comprised of reserve accounts for capital replacements, property taxes and insurance. These restricted funds are subject to supervision and approval by a lender or a government agency. The terms of the contract with the government agency contain certain restrictions concerning operating policies, rental charges, operating expenditures, distributions to owners and other matters. Deferred Financing Costs: Costs incurred in obtaining long-term financing or costs to buy down or hedge interest costs are deferred and amortized over the term of the related debt agreements using the effective interest method. Unamortized financing costs are written-off when debt is retired before the maturity date. The accumulated amortization of such deferred financing costs was $12.6 million and $10.7 million at December 31, 2000 and 1999, respectively. Revenue Recognition: The Partnership leases apartment units to a diverse resident base for terms of one year or less. Credit investigations are performed for all prospective residents and security deposits are also obtained. Resident receivables are evaluated for collectibility each month. Rental revenue is recognized on an accrual basis as it is earned over the life of the lease. Interest income is recorded as earned. Income Taxes: The Partnership's taxable income is reportable by its partners. Accordingly, no provision has been made for federal income taxes in the accompanying statements of operations. Descriptive Information About Reportable Segments: The Partnership operates and develops apartment communities in California which generate rental and other income through the leasing of apartment units to a diverse base of renters. The Partnership separately evaluates the performance of each of its apartment communities. However, because each of the apartment communities have similar economic characteristics, facilities, services and tenants, the apartment communities have been aggregated into a single dominant apartment communities segment. The Partnership evaluates performance and allocates resources primarily based on the net operating income ("NOI") of individual apartment communities. NOI is defined by the Partnership as rental and other income less property expenses and real estate taxes. Accordingly, NOI excludes certain expenses included in the determination of net income. NOI from apartment communities totaled $201.4 million, $177.2 million and $152.8 million for the years ended December 31, 2000, 1999 and 1998, respectively. All other segment measurements are disclosed in the Partnership's consolidated financial statements. F-7 38 IRVINE APARTMENT COMMUNITIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) All revenues are from external customers and there are no revenues from transactions with other segments. There are no tenants which contributed 10% or more of the total revenues during 2000, 1999 or 1998. Interest expense on debt is not allocated to individual apartment communities, even if such debt is secured by the apartment communities. There is no provision for income taxes as the Partnership's taxable income is reported by each of its partners. New Accounting Pronouncement: In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("Statement No. 133"), as amended by Statement No. 137 and Statement No. 138, which is required to be adopted for fiscal years beginning after June 15, 2000. Statement No. 133 will require the Partnership to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, a change in the fair value of the derivative will either be offset against the change in the fair value of the hedged asset, liability or firm commitment through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Management does not currently believe that the implementation of Statement No. 133 will have a material impact on the Partnership 's results of operations or financial position. Reclassifications: Certain amounts in the 1999 and 1998 financial statements have been reclassified to conform with financial statement presentations in 2000. NOTE 3 -- MORTGAGES AND NOTES PAYABLE Tax-Exempt Mortgage Bond Financings: In October 1998, the Partnership assumed $18 million in tax-exempt mortgage bond financings associated with the purchase of a 216-unit apartment community ("One Park Place"). The tax-exempt financings represent loans payable that are collateralized by One Park Place. Monthly interest payments are made to a trustee, which in turn pays the bondholders when interest is due. The bonds bear interest at a weekly remarketed tax-exempt rate and are due April 2025. In September 1999, the Partnership completed a $32 million offering of tax-exempt mortgage bond financings (the "Bonds") for the construction of two apartment buildings comprising of 201 units (the "Project") at the Partnership's Villa Siena property. The Bonds represent loans payable that are collateralized by a deed of trust granting a security interest in the Project. Payment of principal and interest on the Bonds is secured by an irrevocable letter of credit issued by Bank of America, National Association. As a result, the Bonds were assigned the ratings of AA-/A1+, Aa1/P1 and AA/F1+ from Standard & Poor's, Moody's and Fitch IBCA, respectively. Monthly principal and interest payments are made to a trustee, which in turn pays the bondholders when interest is due. The Bonds bear interest at a weekly-remarketed tax-exempt rate and are due September 2029. The Bonds had an average floating interest rate inclusive of fees of 5.11% in December 2000. As of December 31, 2000, the Partnership has received proceeds of $30.1 million that represents land, transaction and development costs related to the Project. The remaining $1.9 million of proceeds (included as a receivable in other assets) is held by a trustee and will be funded for construction of the Project as costs are incurred. Conventional Mortgage Financings: Conventional mortgages are collateralized by apartment communities having a net book value of $572.4 million as of December 31, 2000. The mortgages are generally due in monthly installments and mature at various dates through 2018. Prior to the initial public offering (the "Offering") of IAC, Inc. in 1993, interest rates on eleven of the conventional mortgages were fixed at rates which ranged from 7.75% to 9.63%, with a weighted average rate of 8.69%. In connection with the Offering, the interest rates on these mortgages were adjusted to market rates for specified periods of time and currently range from 6.15% to 8.50%. The interest reduction periods expire prior to the loan maturity dates and the remaining interest reduction periods range from 2002 to 2008. F-8 39 IRVINE APARTMENT COMMUNITIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In September 1999, the Partnership obtained $115 million of conventional mortgage financing from a financial institution. The mortgage financing is secured by three of the Partnership's apartment communities. The financing is due in monthly installments of principal and interest, bears interest at a fixed rate of 7.37% and matures in September 2010. Proceeds from the financing were used to repay the advances from affiliate (see Note 8) and for general construction purposes. In October 1999, the Partnership obtained $70 million of conventional mortgage financing from a financial institution. The mortgage financing is secured by three of the Partnership's apartment communities. The financing is due in monthly installments of principal and interest, bears interest at a fixed rate of 7.15% and matures in October 2009. Proceeds from the financing were used to repay the unsecured term loan and for general construction purposes. In February 2000, the Partnership obtained $78.5 million of conventional mortgage financing from a financial institution. The mortgage financing is secured by two of the Partnership's apartment communities. The financing is due in monthly installments of principal and interest, bears interest at a fixed rate of 7.29% and matures in November 2010. Proceeds from the financing were used for the repayment of certain conventional mortgages and for general construction purposes. During the second quarter of 2000, the Partnership repaid the conventional mortgages securing the Promontory Point and San Paulo apartment communities. In July 2000, the Partnership obtained $26 million of conventional mortgage financing from a financial institution. The mortgage financing is secured by one of the Partnership's apartment communities. The financing is due in monthly installments of principal and interest, bears interest at a fixed rate of 7.5% and matures in August 2011. Proceeds from the financing were used for general construction purposes. In October 2000, the Partnership obtained $112.6 million of conventional mortgage financing from a financial institution. The mortgage financing is secured by three of the Partnership's apartment communities. The financing is due in monthly installments of principal and interest, bears interest at a fixed rate of 7.95% and matures in November 2011. Proceeds from the financing were used for general construction purposes. In December 2000, the Partnership obtained an additional $21.7 million of conventional mortgage financing on five of the Partnership's apartment communities from a financial institution. The additional financing is due in monthly installments of principal and interest, bears interest at a fixed rate of 7.88% and matures in July 2008. Proceeds from the additional financing were used for general construction purposes. As of December 31, 2000, the weighted average interest rate for all the conventional mortgages was 7.50%. Including the amortization of deferred financing costs, the all-in interest rate was 7.78%. Mortgage Notes Payable to The Irvine Company: Two of the Partnership's apartment communities are financed by mortgage notes payable to The Irvine Company. In December 2000, the Partnership obtained an additional $11 million mortgage financing payable to The Irvine Company which is secured by one of the apartment communities. These mortgage notes totaled $58.6 million and $48.6 million at December 31, 2000 and 1999, respectively. The mortgage notes are collateralized by all-inclusive trust deeds on each of the apartment communities financed. They bore a weighted average fixed interest rate of 6.14% at December 31, 2000, are fully amortizing and mature between 2003 and 2024. Interest incurred on the mortgage notes payable to The Irvine Company totaled $2.8 million, $2.8 million and $2.9 million for the years ended December 31, 2000, 1999 and 1998, respectively. The mortgage notes payable to The Irvine Company "wrap around" secured first trust deed notes payable to third-party financial institutions. The secured first trust deed notes totaled $59.2 million and $49.1 million as of December 31, 2000 and 1999, respectively. Tax-Exempt Assessment District Debt: In connection with the Offering, the Partnership assumed certain tax-exempt assessment district debt of the predecessor entity. In conjunction with the purchase of land, the Partnership assumed $2.8 million in 1996 in tax-exempt assessment district debt. Tax-exempt assessment F-9 40 IRVINE APARTMENT COMMUNITIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) district debt represents debt issued by municipal government authorities to finance the construction of infrastructure and improvements. The debt obligations are repaid by the Partnership through assessments. Unsecured Tax-Exempt Bond Financings: In June 1998, the Partnership completed a $334 million offering of unsecured tax-exempt debt at an average interest rate of 4.93% in three tranches ranging from 10 to 15 years. Proceeds from the offering were used to repay the Partnership's existing tax-exempt mortgage debt and to pay costs associated with prepayment penalties and the unwinding of certain swap agreements. The Partnership recorded an extraordinary item related to debt extinguishment of $42.5 million in June 1998. Unsecured Term Loan: In November 1998, the Partnership placed a $100 million unsecured term loan with two banks. The term loan was interest-only and bore interest at LIBOR plus 1.5%. The floating rate had been fixed through an interest rate swap agreement. The term loan matured in November 1999 and was repaid. Unsecured Notes Payable: In May 1997, the Partnership filed a shelf registration statement with the Securities and Exchange Commission providing for the issuance from time to time of up to $350 million of debt securities. In October 1997, the Partnership issued $100 million aggregate principal amount of 7% senior unsecured notes pursuant to its shelf registration statement. The notes are due on October 1, 2007. Net proceeds from the offering of $97.9 million were used to repay indebtedness under the Partnership's line of credit. The Partnership was in compliance with all covenant requirements at December 31, 2000. In June 1999, the Partnership cancelled the remaining availability of $250 million under the shelf registration statement, including the Prospectus Supplement dated April 9, 1998 filed for the future issuance of Medium-Term Notes. The Partnership no longer plans to issue additional securities under the shelf registration statement. Unsecured Line of Credit: The Partnership had a $125 million unsecured revolving credit facility that was amended in June 1999. The amended credit facility bore interest at LIBOR plus 0.65% or prime and was to mature in June 2001. The credit facility was terminated as of December 27, 2000. The Partnership had entered into letters of credit under the credit facility. In conjunction with the termination of the credit facility, the letters of credit under the credit facility were transferred to the credit facility of The Irvine Company. The Partnership continues to pay all fees related to the letters of credit transferred to The Irvine Company, as such letters of credit remain outstanding to secure obligations of the Partnership. Treasury Rate Lock Agreements: The Partnership entered into treasury lock agreements to hedge a planned debt offering of $100 million and lock into a treasury rate of 5.67%. In November 1998, the Partnership terminated all of its outstanding treasury rate lock agreements because management determined that the planned debt offering would not occur. The cost of terminating these agreements was $7.8 million. Capitalized Interest: The Partnership capitalizes interest on projects actively under development using qualifying asset balances and applicable weighted average interest rates. The average qualifying asset balance for projects under development was approximately $80.8 million, $182.7 million and $156.4 million for the years ended December 31, 2000, 1999 and 1998, respectively. Interest capitalized was $6.2 million, $14.4 million and $12.3 million in 2000, 1999 and 1998, respectively. Interest incurred totaled $60.9 million, $50.1 million and $42.1 million for the years ended December 31, 2000, 1999 and 1998, respectively. F-10 41 IRVINE APARTMENT COMMUNITIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Other Matters: Mortgages and notes payable totaling $587.3 million are subject to prepayment penalties at December 31, 2000. MORTGAGES AND NOTES PAYABLE AT DECEMBER 31, 2000

F-11 42 IRVINE APARTMENT COMMUNITIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SCHEDULED PRINCIPAL AMORTIZATION: MORTGAGES AND NOTES PAYABLE AT DECEMBER 31, 2000

NOTE 4 -- FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reported in the balance sheet for financial instruments approximate their fair value except as discussed below. The fair values of the conventional mortgage financings and the mortgage notes payable to The Irvine Company are estimated using discounted cash flow analyses and the Partnership's current estimated borrowing rates for similar types of borrowing arrangements. The interest rate used in the fair value calculation ranges from 6.7% to 8.0% based on the terms of the loan. As of December 31, 2000, the fair values of the conventional mortgage financings and the mortgage notes payable to The Irvine Company were $523.0 million and $50.7 million, respectively. The fair values of the unsecured notes payable and unsecured tax-exempt bond financings based on prevailing interest rates at December 31, 2000 were $96.4 million and $327.0 million, respectively. NOTE 5 -- REDEEMABLE PREFERRED INTERESTS In January 1998, IAC Capital Trust issued 6.0 million of 8 1/4% Series A Preferred Securities. The proceeds of $150 million were used to purchase an equivalent amount of 8 1/4% Series A Preferred Limited Partner Units in the Partnership. The Partnership used the $150 million of proceeds, net of costs and offering expenses, all of which were paid by the Partnership, to repay the outstanding balance on the Partnership's credit facility and to fund development. In November 1998, the Partnership issued 2.0 million of 8 3/4% Series B Preferred Limited Partner Units. The Partnership used the net proceeds to reduce the outstanding balance on its unsecured line of credit. NOTE 6 -- PARTNERS' CAPITAL RECONCILIATION OF COMMON PARTNERSHIP UNITS OUTSTANDING

F-12 43 IRVINE APARTMENT COMMUNITIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NET INCOME ALLOCATION

Stonecrest Village Company, LLC ("SVC"), which owned a 0.68% common limited partnership interest in the Partnership as of March 31, 2000, was owned by California Pacific Homes ("CPH"), an affiliated entity of The Irvine Company. Effective April 1, 2000, Mr. Bren, the 100% owner of The Irvine Company and also the 100% owner of CPH, contributed his ownership of CPH to The Irvine Company. As a result of this contribution of CPH and, accordingly, CPH's 0.68% common limited partnership interest in the Partnership, The Irvine Company owns all the outstanding common limited partnership interests of the Partnership. NOTE 7 -- MERGER BETWEEN IAC, INC. AND ACQUIROR On June 7, 1999, pursuant to the Merger, each outstanding share of IAC, Inc.'s common stock was converted into the right to receive $34 in cash. The Merger and related transactions were accounted for using the purchase method of accounting in accordance with GAAP. Accordingly, the assets and liabilities of the Partnership were adjusted to fair value. The step-up in basis related to IACLLC's and The Irvine Company's investment in the Partnership of $511.8 million approximates the fair value of the net assets acquired and was allocated to the assets of the Partnership using push-down accounting based on the excess of their estimated fair value over their historical carrying amount. Accordingly, $131.9 million of the step-up in basis was allocated to land and $379.9 million was allocated to buildings and improvements. In conjunction with the Merger, IAC, Inc. and the Partnership entered into a separate agreement whereby IAC, Inc. agreed to reimburse the Partnership for all costs of the Merger incurred on IAC, Inc.'s behalf during 1999. In June 1999, the Partnership was reimbursed for $6.6 million of Merger costs, of which $2.6 million had been incurred and expensed during the first quarter of 1999 and $4.0 million was incurred during the second quarter of 1999. Additionally, the Partnership agreed to pay in cash the difference between $34 per share and the exercise price of the vested stock options of IAC, Inc. which were outstanding at the time of the Merger. During the second quarter of 1999, the Partnership's cash payments related to vested stock options totaled $4.1 million, of which $1.8 million was capitalized to real estate under development and $2.3 million was charged to operations as general and administrative expenses. Also in conjunction with the Merger, the Partnership and The Irvine Company entered into a separate agreement whereby The Irvine Company agreed to fund certain construction cost overruns and net operating income shortfalls of the Partnership in connection with the development and operation of nine apartment projects which were under development at the time of the Merger. The Irvine Company is obligated to contribute to the Partnership an amount equal to the difference between the total costs incurred by the F-13 44 IRVINE APARTMENT COMMUNITIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Partnership to complete the construction of the respective apartment project and the amount of the approved budget for such construction. There were no contributions for construction cost overruns made during 2000 or 1999. In addition, The Irvine Company is obligated to contribute to the Partnership an amount equal to the difference between the approved budgeted pro forma stabilized net operating income of the respective apartment project and the net operating income earned by the Partnership from the operation of such property for a period of time not to exceed two years after the completion of such property. There were no contributions for net operating income shortfalls made during 2000 or 1999. NOTE 8 -- CERTAIN TRANSACTIONS WITH RELATED PARTIES Included in general and administrative expenses are charges from The Irvine Company pursuant to an administrative service agreement covering services for information technology and other services totaling $318,000 for the year ended December 31, 2000. The amounts for the corresponding periods in 1999 and 1998 were $99,000 and $185,000, respectively. The Irvine Company and the Partnership jointly purchase employee health care insurance and property and casualty insurance. In addition, the Partnership incurred rent totaling $560,000, $556,000 and $447,000 for the years ended December 31, 2000, 1999 and 1998, respectively, related to leases with The Irvine Company that expire in 2003. IAMC incurred rent totaling $301,000, $203,000 and $156,000 for the years ended December 31, 2000, 1999 and 1998, respectively, related to a lease with The Irvine Company. For the year ended December 31, 1998, The Irvine Company contributed $3.8 million in connection with stock issuances under the dividend reinvestment and additional cash investment plan. The Irvine Company made no contributions under the dividend reinvestment and additional cash investment plan in 2000 or 1999. The Partnership reimburses IACLLC for substantially all of its costs incurred in operating the Partnership, including the compensation of each of the employees of IACLLC who perform services for the Partnership. The aggregate amount paid by the Partnership to IACLLC for such costs was $12.6 million and $6.6 million for the years ended December 31, 2000 and 1999, respectively. The aggregate amount incurred by the Partnership for such costs was $11.9 million and $6.9 million for the years ending December 2000 and 1999, respectively. Subsequent to the Merger, all preacquisition project costs which had been incurred by the Partnership related to future development sites were transferred at book value to The Irvine Company for the development and eventual operation of the sites. In 1999, The Irvine Company reimbursed the Partnership for all of the costs incurred prior to such time, totaling approximately $21.7 million. Included in accounts payable and accrued liabilities at December 31, 2000 is $1.2 million due to The Irvine Company. The amount represents a payable to The Irvine Company for the payment of a $2 million option related to one of the Partnership's properties and unpaid interest and information technology costs, net of amounts owed to the Partnership for general and administrative costs and other expenses incurred by the Partnership on behalf of The Irvine Company. Included in other assets at December 31, 2000 is approximately $11.2 million due from The Irvine Company. The amount represents a receivable of the Partnership for property taxes, general and administrative costs and development costs incurred by the Partnership on behalf of The Irvine Company. Throughout 2000, The Irvine Company advanced to the Partnership amounts totaling $41.5 million. All advances during 2000 accrued interest at 5.75% and were repaid by the end of 2000. For the year ending December 31, 2000, the Partnership incurred approximately $572,000 of interest costs related to the advance. For the year ended December 31, 1999, the Partnership incurred approximately $775,000 of interest costs related to 1999 advances. In October 2000, the Partnership and The Irvine Company entered into a Loan Agreement whereby the Partnership is the lender and The Irvine Company is the borrower. Borrowings under the Loan Agreement F-14 45 IRVINE APARTMENT COMMUNITIES, L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) shall bear interest at a variable or fixed rate to be quoted by the Partnership however the rate shall not be lower than the applicable federal rate or the rate at which interest is paid to the Partnership on its overnight cash investments. The Irvine Company shall make monthly interest payments on each borrowing until the principal is repaid. The Loan Agreement expires in June 2003. As of December 31, 2000, there were no borrowings under the Loan Agreement. NOTE 9 -- SAVINGS PLAN Effective January 1, 1994, IAC, Inc. implemented a defined contribution 401(k) benefit plan covering substantially all employees who have satisfied minimum age and service requirements. Upon the Merger, this plan was transferred to, and is currently maintained by, IACLLC. The Partnership pays for these costs as they relate to IACLLC employees providing services on the Partnership's behalf. The Partnership matches employee contributions up to 50%, within certain limits, which are accrued as incurred. The Partnership also makes contributions to this plan for each participant generally equal to 3% of the participant's base salary. The aggregate cost of these contributions by the Partnership was $151,000, $197,000 and $178,000 in 2000, 1999 and 1998, respectively. NOTE 10 -- AGREEMENTS, COMMITMENTS AND CONTINGENCIES Management Agreement: The Partnership has a management agreement with IAMC whereby IAMC has the exclusive right to manage all of the Partnership's properties. The agreement expires in March 2001. Litigation: The Partnership is party to various legal actions which are incidental to its business. Management believes that these actions will not have a material adverse effect on the Partnership's consolidated financial statements. Assessment Districts: In some of the local jurisdictions within Orange County, assessment districts were formed by local governments to finance major infrastructure improvements. At December 31, 2000, the Partnership had $43.7 million of assessment district debt, of which $20.5 million was reflected in the balance sheet. Rent Restrictions: As of December 31, 2000, 16.0% of the apartment units within the Partnership's stabilized portfolio were required to be set aside for residents within certain income levels and had limitations on the rent that could be charged to such tenants. The rental revenue from five of these projects includes governmental rent subsidy payments of $3.6 million, $3.8 million and $3.9 million for the years ended December 31, 2000, 1999 and 1998, respectively. NOTE 11 -- QUARTERLY FINANCIAL DATA (UNAUDITED)

F-15 46 IRVINE APARTMENT COMMUNITIES, L.P. SCHEDULE III -- CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 2000 (DOLLARS IN THOUSANDS)

F-16 47

F-17 48

--------------- Notes: (a) The aggregate cost of land and buildings for federal income tax purposes is approximately $1,471,357 (unaudited). (b) The gross amount at which buildings and improvements are carried represent historical cost amounts incurred in the development of the projects and capital improvements incurred subsequent to the completion of construction. Prior to IAC, Inc.'s December 1993 initial public offering, the gross land and improvements amounts represent The Irvine Company's historical cost basis. In conjunction with the Merger, the historical cost of land includes a $131.9 million step-up and the historical cost of buildings and improvements includes a $379.9 million step-up. (c) Encumbrances represent debt secured by deeds of trust. (d) Estimated useful lives are five to seven years for furniture and fixtures, five to twenty years for improvements and forty years for buildings. (e) Land acquired from The Irvine Company is recorded at cost based on the purchase price. A summary of activity of real estate and accumulated depreciation is as follows:

F-18 49 REPORT OF INDEPENDENT AUDITORS To The Partners Irvine Apartment Communities, L.P. We have audited the accompanying consolidated balance sheets of Irvine Apartment Communities, L.P., a Delaware limited partnership, as of December 31, 2000 and 1999, and the related consolidated statements of operations, changes in partners' capital and cash flows for each of the three years in the period ended December 31, 2000. Our audits also included the financial statement schedule on pages F-16 through F-18. These financial statements and schedule are the responsibility of management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the 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, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Irvine Apartment Communities, L.P. at December 31, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. ERNST & YOUNG LLP Los Angeles, California March 9, 2001 F-19 50 IAC CAPITAL TRUST BALANCE SHEETS

See accompanying notes. F-20 51 IAC CAPITAL TRUST STATEMENTS OF OPERATIONS AND EQUITY

See accompanying notes. F-21 52 IAC CAPITAL TRUST STATEMENTS OF CASH FLOWS

See accompanying notes. F-22 53 IAC CAPITAL TRUST NOTES TO FINANCIAL STATEMENTS NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION IAC Capital Trust (the "Trust") is a business trust formed on October 31, 1997 under the Delaware Business Trust Act. The Trust commenced operations on January 20, 1998 with the issuance of its redeemable preferred securities. Irvine Apartment Communities LLC ("IACLLC") and certain members of management of IACLLC acquired all of the common securities of the Trust, representing common undivided beneficial interests in all of the assets of the Trust, for an aggregate consideration of $5,000. The Trust is a limited purpose financing vehicle established by Irvine Apartment Communities, L.P. (the "Partnership") and exists for the sole purpose of issuing redeemable preferred securities and investing the proceeds thereof in redeemable preferred limited partner units of the Partnership. The redeemable preferred securities have no voting rights except in limited circumstances. The Trust's declaration does not permit the incurrence by the Trust of any indebtedness for borrowed money or the making of any investment other than in the redeemable preferred limited partner units of the Partnership. The Partnership pays all obligations (other than with respect to the Trust securities) and all costs and expenses of the Trust, including the fees and expenses of the trustees and any income taxes, duties and other governmental charges. NOTE 2 -- REDEEMABLE PREFERRED INTEREST There are 6.0 million redeemable preferred securities outstanding that bear an annual cash distribution rate of 8 1/4% which is paid quarterly. The redeemable preferred securities have a stated maturity of December 31, 2092. NOTE 3 -- INVESTMENT IN IRVINE APARTMENT COMMUNITIES, L.P. The proceeds from the issuance of redeemable preferred securities were invested in redeemable preferred limited partner units of the Partnership which bear an annual cash distribution rate of 8 1/4% which is paid quarterly. The Trust accounts for its investment in the Partnership using the equity method of accounting. NOTE 4 -- INCOME TAXES The Trust has elected to be taxed as a REIT and, as such, will generally not be subject to federal and state income taxation at the corporate level. To maintain its REIT status, the Trust is required to distribute annually at least 95% of its REIT taxable income to its shareholders and to satisfy certain other requirements. Accordingly, no provision has been made for federal income taxes in the accompanying statements of operations. F-23 54 REPORT OF INDEPENDENT AUDITORS To the Trustees IAC Capital Trust We have audited the accompanying balance sheets of IAC Capital Trust, a Delaware Business Trust, as of December 31, 2000 and 1999, and the related statements of operations and equity and cash flows for the years ended December 31, 2000 and 1999 and for the period January 20, 1998 (commencement of operations) through December 31, 1998. These financial statements are the responsibility of management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the 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, the financial statements referred to above present fairly, in all material respects, the financial position of IAC Capital Trust at December 31, 2000 and 1999, and the results of its operations and its cash flows for the years ended December 31, 2000 and 1999 and the period January 20, 1998 (commencement) through December 31, 1998, in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG LLP Los Angeles, California March 9, 2001 F-24 55 INDEX TO EXHIBITS

IRVINE APARTMENT COMMUNITIES L P 10-K