IVT

Business Context and Reporting Period

Company: Inland American Real Estate Trust, Inc. (Inland American)

Reporting Period: Fiscal year ended December 31, 2005.

Overview: Inland American is a Maryland corporation formed in October 2004 to acquire and manage commercial real estate. It operates primarily through a consolidated joint venture, Minto Builders (Florida), Inc. (MB REIT), entered into on October 11, 2005. The company is in the early stages of its initial public offering (IPO), which commenced on August 31, 2005. As of year-end, the portfolio consisted of 37 properties (31 retail, 5 office, 1 industrial) totaling approximately 3.8 million square feet, all acquired through MB REIT.

Key Financial Metrics

Material Changes vs. Prior Period

The company was newly formed in October 2004 with minimal activity. The 2005 period represents a material transformation:

• Asset Growth: Total assets increased from $0.7 million in 2004 to $865.9 million in 2005, driven by the consolidation of MB REIT and the acquisition of 37 properties.
• Revenue Generation: Total income rose from $0 in 2004 to $6.7 million in 2005, primarily from rental income and tenant recoveries.
• Capital Structure: The company raised approximately $98.6 million in gross proceeds from its IPO and incurred $227.7 million in debt (mortgages and margin accounts) to fund acquisitions.
• Loss Position: Despite revenue generation, the company reported a net loss of $1.4 million due to significant depreciation, amortization, and minority interest allocations.

Guidance, Outlook, and Risks

Capital Commitments: Inland American is contractually obligated to invest approximately $1.2 billion in MB REIT by December 31, 2006. As of December 31, 2005, the company had contributed only $47 million and explicitly stated it did not meet the $150 million contribution due on that date. Management does not expect to fully fund the next $150 million contribution due March 31, 2006.

Outlook: The company anticipates funding future obligations through continued public offerings and cash flows. It expects to continue paying distributions at a rate of $0.05 per share per month.

Key Risks and Contingencies:

• Breach of Contract: Failure to meet the $1.2 billion capital contribution deadline could result in breach of contract, potential damages, and loss of control over MB REIT.
• Tenant Concentration: One tenant, SBC, accounted for 44% of consolidated rental revenues in 2005, creating significant concentration risk.
• REIT Status: Failure to qualify as a REIT would subject the company to corporate income taxes.
• Related Party Transactions: Significant reliance on affiliates for management, property acquisition, and financing, with terms not necessarily negotiated at arm's length.
• Derivative Liability: A put/call agreement with Minto Delaware is treated as a derivative instrument, resulting in a $237,000 expense in 2005 due to mark-to-market adjustments.

Investor Verification Checklist

• Capital Contribution Status: Verify the current status of the $1.2 billion commitment to MB REIT and whether the company has secured additional financing to meet the December 2006 deadline.
• SBC Tenant Lease: Review the terms and remaining duration of the lease with SBC, which represents nearly half of the rental revenue.
• Debt Covenants: Confirm compliance with MB REIT's debt covenants, specifically the 55% debt-to-asset ratio (which was 27% with specific adjustments but 64% without).
• Offering Progress: Assess the pace of the ongoing IPO and whether proceeds are sufficient to cover operating expenses and debt service.
• Related Party Fees: Scrutinize the fees paid to the business manager and property managers, which are based on asset values and could increase significantly as the portfolio grows.