InvenTrust Properties - 10-Q quarterly report FY

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

COMMISSION FILE NUMBER: 000-51609

Inland American Real Estate Trust, Inc.

 (Exact name of registrant as specified in its charter)

630-218-8000

 (Registrant’s telephone number, including area code)

______________________________________________________

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

Yes  X      No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer  o          Accelerated filer  o          Non-accelerated filer  X

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

Yes   o    No  X

As of October 27, 2006, there were 108,151,319 shares of common stock outstanding.

TABLE OF CONTENTS

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PART I - Financial Information

Item 1.  Financial Statements

Inland American Real Estate Trust, Inc.

(A Maryland Corporation)

Consolidated Balance Sheets

(Dollar amounts in thousands)

Assets

The accompanying notes are an integral part of the consolidated financial statements.

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INLAND AMERICAN REAL ESTATE TRUST, INC.
(A Maryland Corporation)

Consolidated Balance Sheets
(continued)

(Dollar amounts in thousands)

Liabilities and Stockholders’ Equity

The accompanying notes are an integral part of the consolidated financial statements.

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INLAND AMERICAN REAL ESTATE TRUST, INC.
(A Maryland Corporation)

Consolidated Statements of Operations and Other Comprehensive Income

(Dollar amounts in thousands, except per share amounts)

(unaudited)

The accompanying notes are an integral part of the consolidated financial statements.

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INLAND AMERICAN REAL ESTATE TRUST, INC.
(A Maryland Corporation)

Consolidated Statements of Operations and Other Comprehensive Income

(Dollar amounts in thousands, except per share amounts)

(unaudited)

The accompanying notes are an integral part of the consolidated financial statements.

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INLAND AMERICAN REAL ESTATE TRUST, INC.
(A Maryland Corporation)

Consolidated Statement of Stockholders’ Equity

For the nine month period ended September 30, 2006

(Dollar amounts in thousands)

 (unaudited)

The accompanying notes are an integral part of the consolidated financial statements.

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INLAND AMERICAN REAL ESTATE TRUST, INC.
(A Maryland Corporation)

Consolidated Statements of Cash Flows

(Dollar amounts in thousands)

(unaudited)

The accompanying notes are an integral part of the consolidated financial statements.

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INLAND AMERICAN REAL ESTATE TRUST, INC.
(A Maryland Corporation)

Consolidated Statements of Cash Flows
(Dollar amounts in thousands)

(continued)

(unaudited)

The accompanying notes are an integral part of the consolidated financial statements.

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 Inland American Real Estate Trust, Inc.
(A Maryland Corporation)

Notes To Consolidated Financial Statements

September 30, 2006

(unaudited)
(Dollar amounts in thousands, except per share amounts)

The accompanying Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  Readers of this Quarterly Report should refer to the audited consolidated financial statements of Inland American Real Estate Trust, Inc. for the year ended December 31, 2005, which are included in the Company's 2005 Annual Report on Form 10-K, as certain footnote disclosures contained in such audited consolidated financial statements have been omitted from this Report.  In the opinion of management, all adjustments (consisting or normal recurring accruals) necessary for a fair presentation have been included in this Quarterly Report.P>

(1)  Organization and Basis of Accounting

Inland American Real Estate Trust, Inc. (the "Company") was formed on October 4, 2004 (inception) to acquire and manage a diversified portfolio of commercial real estate, primarily retail properties and multi-family, office and industrial buildings, located in the United States and Canada.  The Business Management Agreement (the "Agreement") appoints Inland American Business Manager & Advisor, Inc. (the "Business Manager"), an affiliate of the Sponsor, to be the Business Manager to the Company.  On August 31, 2005, the Company commenced an initial public offering (the “Offering”) of up to 500,000,000 shares of common stock ("Shares") at $10.00 each and up to 40,000,000 shares at $9.50 each, which may be distributed pursuant to the Company's distribution reinvestment plan.

The Company qualified as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended, for federal income tax purposes commencing with the tax year ended December 31, 2005.  So long as the Company qualifies for treatment as a REIT, the Company generally will not be subject to federal income tax to the extent it distributes 90% of its REIT taxable income to its stockholders.  If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax on its taxable income at regular corporate tax rates.  Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and property and federal income and excise taxes on its undistributed income.

The accompanying Consolidated Financial Statements include the accounts of the Company, as well as all wholly owned subsidiaries and consolidated joint venture investments.  Wholly owned subsidiaries generally consist of limited liability companies (LLC's) and limited partnerships (LP's).  The effects of all significant intercompany transactions have been eliminated.

The Company has ownership interests of 67% to 75% in LLC's which own nine shopping centers.  These entities are considered VIE's as defined in FIN 46(R) and the Company is considered the primary beneficiary of each LLC.  Therefore, these entities are consolidated by the Company.  The LLC agreements contain a put/call provision which grants the right to the outside owners and the Company to require the LLC's to redeem the ownership interests of the outside owners during future periods. These put/call agreements are embedded in the LLC agreement and are accounted for in accordance with EITF  00-04 "Majority Owner's Accounting for a Transaction in the Shares of a Consolidated Subsidiary and a Derivative Indexed to the Minority Interest in that Subsidiary."  Since the outside ownership interests are subject to a put/call arrangement requiring settlement for a fixed amount, the LLC's are treated as 100 % owned subsidiaries by the Company with the amount due the outside owners reflected as a financing and included within other financings in the accompanying Consolidated Financial Statements.  Interest expense is recorded on the liability in an amount generally equal to the preferred return due to the outside owners as provided in the LLC agreements.

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Inland American Real Estate Trust, Inc.
(A Maryland Corporation)

Notes To Consolidated Financial Statements
(continued)

(unaudited)
(Dollar amounts in thousands, except per share amounts)

September 30, 2006

The Company has an ownership interest in Minto Builders (Florida), Inc. ("MB REIT").  The Company has the direct ability to make major decisions for MB REIT and therefore this entity is consolidated by the Company and the outside ownership interests are reflected as minority interests in the accompanying Consolidated Financial Statements.  (See Note 9)

A put/call agreement that was entered into by us and MB REIT as a part of the MB REIT transaction on October 11, 2005 grants Minto (Delaware), LLC, referred to herein as MD, certain redemption rights.  The agreement is considered a free standing financial instrument and is accounted for pursuant to Statement of Financial Accounting Standard No. 150 “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" ("Statement 150") and Statement of Financial Accounting Standards No. 133 “Accounting for Derivative Financial Instruments and Hedging Activities” (“Statement 133”).  Derivatives, whether designated in hedging relationships or not, are recorded on the balance sheet at fair value.  If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings.  This derivative was not designated as a hedge.

 (2)  Summary of Significant Accounting Policies

The accompanying Consolidated Financial Statements have been prepared in accordance with GAAP and require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Certain reclassifications were made to the 2005 financial statements to conform to the 2006 presentations.

In accordance with SFAS No. 144, the Company performs an analysis to identify impairment indicators to ensure that the investment property's carrying value does not exceed its fair value.  The valuation analysis performed by the Company is based upon many factors which require difficult, complex or subjective judgments to be made.  Such assumptions include projecting vacancy rates, rental rates, operating expenses, lease terms, tenant financial strength, economy, demographics, property location, capital expenditures and sales value among other assumptions to be made upon valuing each property.   This valuation is sensitive to the actual results of any of these uncertain factors, either individually or taken as a whole.  Based upon the Company's judgment, no impairment was warranted as of September 30, 2006.

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Inland American Real Estate Trust, Inc.
(A Maryland Corporation)

Notes To Consolidated Financial Statements
(continued)

(unaudited)
(Dollar amounts in thousands, except per share amounts)

September 30, 2006

The application of the SFAS Nos. 141 and 142 resulted in the recognition upon acquisition of additional intangible assets and liabilities relating to real estate acquisitions during the nine months ended September 30, 2006. The portion of the purchase price allocated to acquired above market lease costs and acquired below market lease costs are amortized on a straight line basis over the life of the related lease as an adjustment to rental income and over the respective renewal period for below market lease costs with fixed rate renewals. Amortization pertaining to the above market lease costs of $220 was applied as a reduction to rental income for the nine months ended September 30, 2006.  Amortization pertaining to the below market lease costs of $834 was applied as an increase to rental income for the nine months ended September 30, 2006.

The portion of the purchase price allocated to acquired in-place lease intangibles is amortized on a straight line basis over the life of the related lease. The Company incurred amortization expense pertaining to acquired in-place lease intangibles of $7,278 for the nine months ended September 30, 2006.

The following table presents the amortization during the next five years related to the acquired in-place lease intangibles, acquired above market lease costs and the below market lease costs for properties owned at September 30, 2006.

(1)

For the three month period from October 1, 2006 through December 31, 2006.

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Inland American Real Estate Trust, Inc.
(A Maryland Corporation)

Notes To Consolidated Financial Statements
(continued)

(unaudited)
(Dollar amounts in thousands, except per share amounts)

September 30, 2006

Concentration of credit risk with respect to accounts receivable is limited due to the large number of tenants comprising the Company's rental revenue.  One tenant, SBC, accounted for 28% of consolidated rental revenues for the nine months ended September 30, 2006.  This concentration of revenues by one tenant increases the Company's risk associated with nonpayment by this tenant.  In an effort to reduce risk, the Company performs ongoing credit evaluations of its larger tenants.  

The estimated fair value of the Company's mortgage debt is $754,845 as of September 30, 2006. The Company estimates the fair value of its mortgages payable by discounting the future cash flows of each instrument at rates currently offered to the Company for similar debt instruments of comparable maturities by the Company's lenders. The carrying amount of the Company's other financial instruments approximate fair value because of the relatively short maturity of these instruments.

The Company applies the fair value method of accounting as prescribed by SFAS No. 123(R), Share-Based Payment for its stock options granted.  Under this method, the Company reports the value of granted options as a charge against earnings ratably over the vesting period.

Income taxes for certain state and local taxes are accounted for under the asset and liability method.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to difference between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date.

The application of Interpretation No. 47 (“FIN 47”), “Accounting for Conditional Asset Retirement Obligations, which is an interpretation of FASB Statement No. 143” resulted in the recognition upon acquisition of additional real estate assets and liabilities of $8,919, which is recorded in building and other improvements and prepaid rental and recovery income and other liabilities on the balance sheet.  FIN 47 refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. An entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The fair value of a liability for the conditional asset retirement obligation should be recognized when incurred, generally upon acquisition, construction, or development and through the normal operation of the asset.  For the three and nine months ended September 30, 2006, the Company recognized $71 of expense related to the accretion of the asset retirement obligation which is recorded in property operating expenses to non-related parties.

In June 2005, the FASB ratified the EITF's consensus on Issue No. 04-5 “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights.” This consensus established the presumption that general partners in a limited partnership control that limited partnership regardless of the extent of the general partners' ownership interest in the limited partnership. The consensus further establishes that the rights of the limited partners can overcome the presumption of control by the general partners, if the limited partners have either (a) the substantive ability to dissolve (liquidate) the limited partnership or otherwise remove the general partners without cause or (b) substantive participating rights. Whether the presumption of control is overcome is a matter of judgment based on the facts and circumstances, for which the c onsensus provides additional guidance. This consensus is currently applicable to the Company for all partnerships. This consensus applies to limited partnerships or similar entities, such as limited liability companies that have governing provisions that are the functional equivalent of a limited partnership.

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Inland American Real Estate Trust, Inc.
(A Maryland Corporation)

Notes To Consolidated Financial Statements
(continued)

(unaudited)
(Dollar amounts in thousands, except per share amounts)

September 30, 2006

In September 2006, the SEC's staff issued Staff Accounting Bulletin (SAB) No. 108 "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements."  This Bulletin provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment.  The guidance in this Bulletin must be applied to financial reports covering the first fiscal year ending after November 15, 2006.  We do not believe that implementing the guidance in this Bulletin will have a material effect on our 2006 annual financial statements.

In June 2006, the FASB issued Interpretation No. 48, "Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109."  This Interpretation defines a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  The Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.  This Interpretation is effective for fiscal years beginning after December 15, 2006.  We do not believe that implementing the guidance in this Interpretation will have a material effect on our 2006 annual financial statements.

(3)  Transactions with Related Parties

As of September 30, 2006 and December 31, 2005, the Company had incurred $101,681 and $13,147 of Offering costs, respectively, of which $90,294 and $7,663 was paid or accrued to related parties. In accordance with the terms of the Offering, the Business Manager has guaranteed payment of all offering expenses (excluding sales commissions and the marketing contribution and the due diligence expense allowance) in excess of 4.5% of the gross proceeds of the Offering or all organization and offering expenses (including selling commissions) which together exceed 15% of gross offering proceeds.  As of September 30, 2006 and December 31, 2005, offering costs did not exceed the 4.5% and 15% limitations.  The Company anticipates that these costs will not exceed these limitations upon completion of the Offering. Any excess amounts at the completion of the Offering will be reimbursed by the Business Manager.

The Business Manager and its related parties are entitled to reimbursement for salaries and expenses of employees of the Business Manager and its related parties relating to the Offering.  In addition, a related party of the Business Manager is entitled to receive selling commissions, and the marketing contribution and due diligence expense allowance from the Company in connection with the Offering.  Such costs are offset against the stockholders' equity accounts. Such costs totaled $32,764 and $80,736 for the three and nine months ended September 30, 2006, respectively, of which $1,657 was unpaid as of September 30, 2006.

The Business Manager and its related parties are entitled to reimbursement for general and administrative expenses of the Business Manager and its related parties relating to the Company's administration.  Such costs are included in general and administrative expenses to related parties, professional services to related parties, and acquisition cost expenses to related parties, in addition to costs that were capitalized pertaining to property acquisitions.  For the three and nine months ended September 30, 2006, the Company incurred $1,355 and $2,940 of these costs, respectively, of which $418 remained unpaid as of September 30, 2006.

A related party of the Business Manager provides loan servicing to the Company for an annual fee.  Such costs are included in property operating expenses to related parties.  The agreement allows for annual fees totaling .03% of the first billion in mortgage balance outstanding and .01% of the remaining mortgage balance, payable monthly.  For the three and nine months ended September 30, 2006, these fees totaled $18 and $30, respectively.  None remained unpaid as of September 30, 2006.

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Inland American Real Estate Trust, Inc.
(A Maryland Corporation)

Notes To Consolidated Financial Statements
(continued)

(unaudited)
(Dollar amounts in thousands, except per share amounts)

September 30, 2006

The Company pays a related party of the Business Manager a fee equal to .2% of the principal amount of each loan placed for the Company.  Such amounts are capitalized as loan fees and amortized over the respective loan term.  For the three and nine months ended September 30, 2006, the Company paid loan fees totaling $685 and $1,186, respectively, to this related party.  None remained unpaid as of September 30, 2006.

After the Company's stockholders have received a non-cumulative, non-compounded return of five percent (5.0%) per annum on their “invested capital,” the Company will pay its Business Manager an annual business management fee of up to one percent (1.0%) of the “average invested assets,” payable quarterly in an amount equal to one-quarter of one percent (0.25%) of the average invested assets as of the last day of the immediately preceding quarter.  For these purposes, “invested capital” means the original issue price paid for the shares of the common stock reduced by prior distributions from the sale or financing of properties.  For these purposes, “average invested assets” means, for any period, the average of the aggregate book value of assets, including lease intangibles, invested, directly or indirectly, in financial instruments, debt and equity securities and equity interests in and loans secured by real estate assets, including amounts invested in REITs and other real estate operating companies, before reserves for depreciation or bad debts or other similar non-cash reserves, computed by taking the average of these values at the end of each month during the period.  The Company will pay this fee for services provided or arranged by the Business Manager, such as managing day-to-day business operations, arranging for the ancillary services provided by other related parties and overseeing these services, administering bookkeeping and accounting functions, consulting with the board, overseeing  real estate assets and providing other services as the board deems appropriate.  This fee terminates if the Company acquires the Business Manager.  Separate and distinct from any business management fee, the Company also reimburses the Business Manager or any related party for all expenses that it, or any related party including the sponsor, pays or incurs on its behalf inclu ding the salaries and benefits of persons employed by the Business Manager or its related parties and performing services for the Company except for the salaries and benefits of persons who also serve as one of the executive officers or as an executive officer of the Business Manager.  For any year in which the Company qualifies as a REIT, its Business Manager must reimburse the Company for the amounts, if any, by which the total operating expenses paid during the previous fiscal year exceed the greater of: two percent (2.0%) of the average invested assets for that fiscal year; or twenty-five percent (25.0%) of net income for that fiscal year, subject to certain adjustments described herein.  For these purposes, items such as organization and offering expenses, property expenses, interest payments, taxes, non-cash charges, any incentive fees payable to the Business Manager and acquisition fees and expenses are excluded from the definition of total operating expenses.  The Company incurred fees of $1,200 for the three months ended September 30, 2006, all of which remained unpaid as of September 30, 2006.  The Business Manager has agreed to waive all fees allowed but not taken, except for the $1,200, for the nine months ended September 30, 2006.

The property manager, an entity owned principally by individuals who are related parties of the Business Manager, is entitled to receive property management fees totaling 4.5% of gross income, for management and leasing services.  The Company incurred and paid property management fees of $1,466 and $2,946, respectively, and has been recorded in property operating expenses to related parties for the three and nine months ended September 30, 2006.  None remained unpaid as of September 30, 2006.

The Company has entered into a fee arrangement with Inland Western Retail Real Estate Trust, Inc., ("Inland Western") whereby Inland Western is paid for guarantying customary non-recourse carve out provisions of the Company’s financings until such time as the Company reaches a net worth of $300,000 and the lender releases the guaranty.  The fee arrangement calls for a fee of $50 annually for loans equal to and in excess of $50,000 and $25 annually for loans less than $50,000.  The Company incurred fees totaling $44 and $134, respectively, for the three and nine months ended September 30, 2006.  All fees had been paid to Inland Western as of September 30, 2006.  On September 30, 2006, five of the six remaining guarantees were released by the lenders.  

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Inland American Real Estate Trust, Inc.
(A Maryland Corporation)

Notes To Consolidated Financial Statements
(continued)

(unaudited)
(Dollar amounts in thousands, except per share amounts)

September 30, 2006

Inland Western has invested $264,003 and $224,003 in MB REIT in series C preferred shares as of September 30, 2006 and December 31, 2005, respectively.

The Company established a discount stock purchase policy for related parties and related parties of the Business Manager that enables the related parties to purchase shares of common stock at either $8.95 or $9.50 a share depending on when the shares are purchased.  The Company sold 49,608 and 160,416 shares to related parties and recognized an expense related to these discounts of $37 and $141, respectively, for the three and nine months ended September 30, 2006.

The Company retains a related party of the Business Manager to manage the Company's portfolio of marketable securities.  The Company incurred fees to this entity totaling $257 and $565, respectively, during the three and nine months ended September 30, 2006, of which $87 was unpaid as of September 30, 2006.

As of September 30, 2006 the Company was repaid funds from related parties in the amount of $451 which was due from related parties for costs paid by the Company on their behalf.

The Company entered into an agreement with a limited liability company formed as an insurance association captive, which is wholly owned by three other related parties, Inland Real Estate Corporation, Inland Retail Real Estate Trust, Inc. and Inland Western Retail Real Estate Trust, Inc. and serviced by a related party, Inland Risk and Insurance Management Services Inc.  The Company became a member of the limited liability company (L.L.C.) on October 1, 2006.  The L.L.C. was formed to initially insure/reimburse the members' deductible obligations for the first $100 of property insurance and $100 of general liability insurance.  The Company entered into the L.L.C. to stabilize its insurance costs, manage its exposures and recoup expenses through the functions of the captive program.  The L.L.C. will be capitalized with $750 in cash, of which the Company's initial contribution will be $188.

(4)  Note receivable

The note receivable balance of $41,477 as of September 30, 2006 consisted of one installment note from Fourth Quarter Properties 124, LLC that matures on December 31, 2006 with an optional extension term of three months.  The note is secured by a first mortgage on the 9.68 acres located in Orange County, Florida.    Interest only is due in advance on the first of each month at a rate of 9.25% per annum.  Upon closing, an interest reserve escrow totaling three months of interest payments was established for the note.

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Inland American Real Estate Trust, Inc.
(A Maryland Corporation)

Notes To Consolidated Financial Statements
(continued)

(unaudited)
(Dollar amounts in thousands, except per share amounts)

September 30, 2006

(5)  Investment Securities

Investment in securities of $148,933 and $28,614 at September 30, 2006 and December 31, 2005, respectively, consists of preferred and common stock investments in other REITs which are classified as available-for-sale securities and recorded at fair value. Unrealized holding gains and losses on available-for-sale securities are excluded from earnings and reported as a separate component of comprehensive income until realized. Of the investment securities held on September 30, 2006 and December 31, 2005, the Company has accumulated other comprehensive income of $8,766 and $500, respectively. Realized gains and losses from the sale of available-for-sale securities are determined on a specific identification basis. During the three and nine months ended September 30, 2006 the Company realized a gain of $1,351 and $1,973, respectively, on the sale of shares. Dividend income is recognized when earned. During the three and nine months end ed September 30, 2006, dividend income of $2,392 and $4,933, respectively, was recognized and is included in interest and dividend income on the Consolidated Statement of Operations.

The Company has purchased a portion of its investment securities through a margin account. As of September 30, 2006, and December 31, 2005, the Company has recorded a payable of $61,219 and $14,097, respectively, for securities purchased on margin. This debt bears variable interest rates ranging between the London InterBank Offered Rate ("LIBOR") plus 25 basis points and LIBOR plus 50 basis points. At September 30, 2006, these rates were equal to a range between 5.58% and 5.83%. Interest expense in the amount of $877 and $1,666 is recognized in interest expense on the Consolidated Statement of Operations for the three and nine months ended September 30, 2006, respectively.

(6)  Stock Option Plan

The Company has adopted an Independent Director Stock Option Plan (the "Plan") which, subject to certain conditions, provides for the grant to each independent director of an option to acquire 3,000 shares following their becoming a director and for the grant of additional options to acquire 500 shares on the date of each annual stockholders' meeting. The options for the initial 3,000 shares are exercisable as follows: 1,000 shares on the date of grant and 1,000 shares on each of the first and second anniversaries of the date of grant. The subsequent options will be exercisable on the second anniversary of the date of grant. The initial options will be exercisable at $8.95 per share. The subsequent options will be exercisable at the fair market value of a share on the last business day preceding the annual meeting of stockholders as determined under the Plan. During the three and nine months ended September 30, 2006, the Company issued 0 and 17,500 options to its independent directors, respectively .  As of September 30, 2006 there were a total of 17,500 options issued, of which none had been exercised or expired. The per share weighted average fair value of options granted was $.44 on the date of the grant using the Black Scholes option-pricing model.   During the three and nine months ended September 30, 2006, the Company recorded $1 and $4, respectively, of expense related to stock options.

(7) Leases

Master Lease Agreements

In conjunction with certain acquisitions, the Company received payments under master lease agreements pertaining to certain non-revenue producing spaces at the time of purchase, for periods ranging from three months to three years after the date of purchase or until the spaces are leased.  As these payments are received, they are recorded as a reduction in the purchase price of the respective property rather than as rental income.  The amount of such payments received for the three and nine months ended September 30, 2006 was $118 and $157, respectively.

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Inland American Real Estate Trust, Inc.
(A Maryland Corporation)

Notes To Consolidated Financial Statements
(continued)

(unaudited)
(Dollar amounts in thousands, except per share amounts)

September 30, 2006

Operating Leases

Minimum lease payments to be received under operating leases, excluding rental income under master lease agreements and assuming no expiring leases are renewed, are as follows:

*  For the twelve month period from January 1, 2006 through December 31, 2006, taking into account the date of acquisition of the properties acquired as of September 30, 2006.

Ground Leases

The Company leases land under noncancelable operating leases at certain of the properties expiring in various years from 2020 to 2084.  For the three and nine months ended September 30, 2006, ground lease rent was $54 and $161, respectively.  Minimum future rental payments to be paid under the ground leases are as follows:

*  For the twelve month period from January 1, 2006 through December 31, 2006, taking into account the date of acquisition of the properties acquired as of September 30, 2006.

(8) Mortgages and Margins Payable

Mortgage loans outstanding as of September 30, 2006, and December 31, 2005, were $777,956 and $213,557, respectively, and had a weighted average interest rate of 5.13% and 4.99%, respectively.  All of the loans have fixed interest rates ranging from 4.83% to 6.01%.  Properties with a net carrying value of $1,231,723 and $342,821 at September 30, 2006, and December 31, 2005, respectively, and related tenant leases are pledged as collateral. As of September 30, 2006, scheduled maturities for the Company's outstanding mortgage indebtedness had various due dates through December 2035.

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Inland American Real Estate Trust, Inc.
(A Maryland Corporation)

Notes To Consolidated Financial Statements
(continued)

(unaudited)
(Dollar amounts in thousands, except per share amounts)

September 30, 2006

Some of the mortgage loans require compliance with certain covenants, such as debt service ratios, investment restrictions and distribution limitations.  As of September 30, 2006, the Company was in compliance with such covenants.

The debt maturity excludes mortgage discounts associated with debt assumed at acquisition of which $3,764, net of accumulated amortization, is outstanding as of September 30, 2006.

The Company has purchased a portion of its investment securities through margin accounts.  As of September 30, 2006, and December 31, 2005, the Company has recorded a payable of $61,219 and $14,097, respectively, for securities purchased on margin.  This debt bears variable interest rates ranging between the London InterBank Offered Rate ("LIBOR") plus 25 basis points and LIBOR plus 50 basis points.  At September 30, 2006, these rates were equal to a range between 5.58% and 5.83%.

(9)  Minority Interest

As a holder of common stock of MB REIT, the Company is entitled to receive distributions, paid on a monthly basis (or otherwise as declared by the Board of Directors or a committee of the Board of Directors authorized to declare dividends) from available cash, after dividends have been paid on any outstanding preferred stock including any accrued and unpaid dividends. The series A preferred stock entitles the holder to receive dividends, payable on a quarterly basis, equal to 3.5% of the face amount of the series A preferred stock.  The series B preferred stock entitles the holder to an annual dividend of 12.5% on the face amount of the series B stock, payable semi-annually.  The series C preferred stock entitles the holder to receive dividends, payable monthly, equal to 7% of the face amount of the series C preferred stock.  As of September 30, 2006 and October 27, 2006, the Company has purchased common shares in MB REIT for a total investment of $450,000 and $550,000, respectively.

MB REIT's articles of incorporation do not permit, at any time, the ratio of the outstanding principal amounts of borrowings plus the outstanding series A preferred shares value to the fair market value of the total assets of MB REIT to be greater than 55%.  This limit is more restrictive than the policy promulgated by our board of directors to limit total debt to 55% of total capital.  In particular, total assets are defined in MB REIT's articles of incorporation to mean as of any date, the undepreciated real estate assets (excluding cash) of MB REIT and its subsidiaries and total borrowings include the series A preferred stock. The debt covenant ratio is performed at the end of the most recent calendar quarter.  In calculating compliance with this covenant, the series A preferred shareholders agreed to exclude the series A preferred shares from the total of MB REIT's outstanding borrowings and to include MB REIT's cash and the Company’s cash (including marketable securities) to the extent not committed and available for investment in common stock in MB REIT as part of its total assets for purposes of calculating compliance with the debt covenant ratio.  As of September 30, 2006, the debt ratio was 34% based on the exclusion of the series A preferred shares from the total of MB REIT's outstanding borrowings and including MB REIT's cash as part of its total assets.  

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Inland American Real Estate Trust, Inc.
(A Maryland Corporation)

Notes To Consolidated Financial Statements
(continued)

(unaudited)
(Dollar amounts in thousands, except per share amounts)

September 30, 2006

Pursuant to the terms of a put/call agreement entered into with MD, the Company may be required to redeem MD's interest in the MB REIT.  Under SFAS 150 and SFAS 133 the put/call arrangements are considered free standing derivative instruments.  The assets or liabilities under these puts and calls are marked to market every quarter with changes in the value recorded in other expense in the consolidated statements of operations.  The value of the put/call arrangements was a liability of ($23) and ($237) as of September 30, 2006 and December 31, 2005, respectively, included in prepaid rental and recovery income and other liabilities, resulting in unrealized gains (losses) on derivative instruments of ($401) and $214, respectively, included in other income for the three and nine months ended September 30, 2006.

The following tables present condensed financial information for MB REIT as of September 30, 2006 and December 31, 2005, and for the three and nine months ended September 30, 2006.

The minority interest represents outside interests in MB REIT and is comprised of:

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Inland American Real Estate Trust, Inc.
(A Maryland Corporation)

Notes To Consolidated Financial Statements
(continued)

(unaudited)
(Dollar amounts in thousands, except per share amounts)

September 30, 2006

For the three months ended September 30, 2006.

For the nine months ended September 30, 2006.

(1)

owned by Minto Delaware, Inc.

(2)

owned by third party investors.

(3)

owned by Inland Western Retail Real Estate Trust, Inc.

(4)

income allocation not indicative of income tax allocation.

Allocations of profit and loss are made first to series A, B, and C preferred shareholders to equal their distributions and then to the common shareholders in accordance with their ownership interest.  The income allocation for the common shareholders for the three and nine months ended September 30, 2006 was based on the monthly average ownership percentages of the shareholders during the period.  As of September 30, 2006, Inland American and MD's effective ownership interest of the common stock was 94% and 6%, respectively.

(10) Income Taxes

In the second quarter of 2006, the state of Texas enacted new tax legislation.  This legislation restructures the state business tax in Texas by replacing the taxable capital and earned surplus components of the current franchise tax with a new “margin tax,” which for financial reporting purposes is considered an income tax.  As such, the Company has recorded a net deferred tax liability and deferred income tax (benefit) expense related to temporary differences of ($104) and $1,558 for the three and nine months ended September 30, 2006, respectively

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Inland American Real Estate Trust, Inc.
(A Maryland Corporation)

Notes To Consolidated Financial Statements
(continued)

(unaudited)
(Dollar amounts in thousands, except per share amounts)

September 30, 2006

The temporary differences that give rise to the net deferred tax liability at September 30, 2006 consist of the following:

The Company has estimated its deferred income tax expense tax using the effective Texas margin tax rate of 1%.

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Inland American Real Estate Trust, Inc.
(A Maryland Corporation)

Notes To Consolidated Financial Statements
(continued)

(unaudited)
(Dollar amounts in thousands, except per share amounts)

September 30, 2006

 (11)  Segment Reporting

The Company has four business segments: Office, Retail, Industrial and Multi-family.  The Company evaluates segment performance primarily based on net property operations.  Net property operations of the segments do not include interest expense, depreciation and amortization, general and administrative expenses, minority interest expense, or interest and other investment income from corporate investments.  The following table summarizes net property operations income by segment for the three and nine months ended September 30, 2006.

For the three months ended September 30, 2006

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Inland American Real Estate Trust, Inc.
(A Maryland Corporation)

Notes To Consolidated Financial Statements
(continued)

(unaudited)
(Dollar amounts in thousands, except per share amounts)

September 30, 2006

For the nine months ended September 30, 2006.

The Company does not derive any of its consolidated revenue from foreign countries and has one major tenant, SBC, which individually accounted for 28% of the Company's consolidated rental revenues for the nine months ended September 30, 2006.

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Inland American Real Estate Trust, Inc.
(A Maryland Corporation)

Notes To Consolidated Financial Statements
(continued)

(unaudited)
(Dollar amounts in thousands, except per share amounts)

September 30, 2006

(12)  Earnings (loss) per Share

Basic earnings (loss) per share ("EPS") are computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period (the "common shares").  Diluted EPS is computed by dividing net income (loss) by the common shares plus shares issuable upon exercising options or other contracts. As a result of the net income for the three months ended September 30, 2006 and the net loss incurred for the nine months ended September 30, 2006 and the three and nine months ended 2005, diluted weighted average shares outstanding do not give effect to common stock equivalents as to do so would be anti-dilutive or immaterial.

The basic and diluted weighted average number of common shares outstanding was 76,848,460 and 47,631,587 for the three and nine months ended September 30, 2006.

(13)  Commitments and Contingencies

The Company has acquired several properties which have earnout components, meaning the Company did not pay for portions of these properties that were not rent producing.  The Company is obligated, under certain agreements, to pay for those portions when the tenant moves into its space and begins to pay rent.  The earnout payments are based on a predetermined formula. Each earnout agreement has a time limit regarding the obligation to pay any additional monies.  If at the end of the time period allowed certain space has not been leased and occupied, the Company will own that space without any further obligation. Based on pro forma leasing rates, the Company may pay as much as $30,872 in the future, as vacant space covered by earnout agreements is occupied and becomes rent producing.

The Company has entered into interest rate lock agreements with lenders to secure interest rates on mortgage debt on properties the Company owns or will purchase in the future.  The deposits are applied as credits to the mortgage funding as they occur.  As of September 30, 2006, the Company has approximately $8,500 of rate lock deposits outstanding.  The agreements locked interest rates ranging from 5.321% to 5.948% on approximately $565,000 in principal.

Inland American was required to purchase the remaining shares of MB REIT worth approximately $722,000 by December 31, 2006, however on October 27, 2006, the series A preferred shareholders agreed to extend the obligation to March 31, 2007. In addition, MB REIT was obligated to repurchase the series C preferred in the amount of $264,000 by December 31, 2006, however, the series A preferred shareholders have agreed to extend the obligation to January 31, 2007.

(14)  Subsequent Events

The Company paid distributions of $4,460 to our stockholders in October 2006.

The Company issued 13,315,188 shares of common stock from October 1, 2006 through October 27, 2006, resulting in a total of 108,151,319 shares of common stock outstanding. As of October 27, 2006, subscriptions for a total of 106,704,608 shares were received resulting in total gross offering proceeds of $1,067,046 and an additional 1,446,711 shares were issued pursuant to the DRP for $13,816 of additional gross proceeds.

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Inland American Real Estate Trust, Inc.
(A Maryland Corporation)

Notes To Consolidated Financial Statements
(continued)

(unaudited)
(Dollar amounts in thousands, except per share amounts)

September 30, 2006

The Company has acquired the following properties during the period October 1 to October 27, 2006.  The respective acquisitions are summarized in the table below.

The Company is obligated under earnout agreements to pay additional funds after certain tenants move into the vacant space and begins paying rent.  During the period from October 1 to October 27, 2006, the Company funded earnouts totaling $672 at one of the existing properties.

There were no mortgage debt financings obtained from the period October 1 to October 27, 2006.

In October 2006, MB REIT paid distributions to series C preferred stockholders of $1,570 and paid distributions of $6,000 to common stockholders.

Inland American purchased 78,370 shares of the special voting stock of MB REIT in the amount of $100,000 in October 2006.

On October 26, 2006, Inland American participated out 25% or $10,369 of the note receivable (See Note 4) to Inland Real Estate Corporation (IRC), a related party.  IRC will receive their prorata share of interest and loan fees.

On October 27, 2006 the Series A shareholders of MB REIT signed a letter to extend the date that the Company is required to invest $1,200,000 into MB REIT to March 31, 2007 and to extend the date that the Series C shareholders are to be redeemed to January 31, 2007.  In addition the series A shareholders also signed a letter to modify the definition of “Adjusted Total Assets” as defined in the MB REIT’s Second Amended and Restated Articles of Incorporation to be equal to the sum of :(A) the Adjusted Total Assets (as calculated under the articles) plus (B) the Company’s cash and cash equivalents (including marketable securities).  For purposes of the prior sentence:  (1) “cash and cash equivalents” shall mean all demand deposits, money market accounts and investments in certificates of deposit and repurchase agreements purchased with a maturity of three months or less, at the date of purc hase, and (2) “marketable securities” shall mean financial instruments and foreign currencies (such as notes, stock, preferred shares, bonds, debentures, options, futures, swaps, rights, warrants and other similar financial assets) which are actively traded on an established securities market, a secondary market or the substantial equivalent thereof.

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

We electronically file our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports with the Securities and Exchange Commission ("SEC").  The public may read and copy any of the reports that are filed with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549-3628.  The public may obtain information on the operation of the Public Reference room by calling the SEC at (800)-SEC-0330.  The SEC maintains an Internet site at (www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically.

Certain statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this quarterly report on Form 10-Q constitute "forward-looking statements" within the meaning of the Federal Private Securities Litigation Reform Act of 1995.  Forward-looking statements are statements that are not historical, including statements regarding management's intentions, beliefs, expectations, representations, plans or predictions of the future and are typically identified by words such as "believe," "expect," "anticipate," "intend," "estimate," "may," "will," "should" and "could."  The Company intends that such forward-looking statements be subject to the safe harbors created by Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  These forward-looking st atements involve numerous risks and uncertainties that could cause our actual results to be materially different from those set forth in the forward-looking statements.  Examples of factors which could affect our performance are set forth in our annual report on Form 10-K for the year ended December 31, 2005, as filed with the Securities and Exchange Commission on March 15, 2006.

The following discussion and analysis relates to the three and nine months ended September 30, 2006.  You should read the following discussion and analysis along with our Consolidated Financial Statements and the related notes included in this report. All dollar amounts are stated in thousands, except per share amounts.  A discussion of activity for the three and nine months ended September 30, 2005 is not included because we were newly formed and did not have any significant operating or other activity during that period.

Executive Summary

Inland American Real Estate Trust, Inc., herein referred to as Inland American, was incorporated in October 2004 to acquire and manage a diversified portfolio of commercial real estate, primarily retail properties and multi-family, office and industrial buildings located in the United States and Canada. Our sponsor, Inland Real Estate Investment Corporation, herein referred to as our sponsor, is a subsidiary of The Inland Group, Inc.  Various affiliates of our sponsor are involved in our operations, including our property managers, Inland American Retail Management LLC, Inland American Office Management LLC, Inland American Industrial Management LLC and Inland American Apartment Management LLC and our business manager, Inland American Business Manager and Advisor, Inc., all of whom are affiliates of The Inland Group, Inc.  On August 31, 2005, we commenced our initial public offering of up to 500,000,000 shares of common stock or shares at $10 each, and up to 40,000,000 shares at $9.50 each, which may be purchased through our dividend reinvestment plan, herein referred to as DRP.

As of September 30, 2006, subscriptions for a total of 93,683,497 shares had been received including 20,000 shares issued to our sponsor.  In addition, we sold 1,152,634 shares through our DRP.  As a result of these sales, we have raised a total of $947,857 of gross offering proceeds as of September 30, 2006.  

Our goal is to deliver returns to our stockholders through the acquisition of investment properties, creation of strategic joint ventures, and management of the related properties consisting of retail, office, industrial and multi-tenant properties.  We actively manage our assets by leasing and releasing space at favorable rates, controlling expenses, and maintaining strong tenant relationships.  We intend on potentially creating additional value through redeveloping and repositioning some of our properties in the future.  We have distributed funds generated from cash flow from operating and investing activities including interest earned on cash investments and investment income earned and sale from marketable securities to our stockholders.

During the three months ended September 30, 2006, Minto Builders (Florida), Inc., herein referred to as MB REIT, invested approximately $544,340 to acquire six retail and two office properties containing an aggregate of approximately 2,386,757 square feet.  In addition, MB REIT borrowed approximately $330,415 secured by eight of its properties.  In

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addition,  for the three months ended September 30, 2006, Inland American invested $20,650 in marketable securities, recorded $8,507 of accumulated other comprehensive income and realized a gain of $1,351 on the sale of shares and earned dividend income of $2,393.

On a consolidated basis, essentially all of our revenues and operating cash flows this year were generated by collecting rental payments from our tenants, interest income on cash investments, and dividend income earned from investments in marketable securities.  Our goal is to continue increasing our revenues by acquiring additional investment properties or operating companies and re-leasing those spaces that are vacant, or may become vacant, at more favorable rental rates.  Our and MB REIT's largest expenses relate to the operation of our properties as well as the interest expense on the mortgages payable.  Our and MB REIT's property operating expenses include, but are not limited to, real estate taxes, regular maintenance, landscaping, snow removal and periodic renovations to meet tenant needs.  Pursuant to the lease agreements, some tenants of various properties are required to reimburse us for some or all of the particular tenant's pro rata share of the real estate taxes and operating expenses of the property.

Strategies and Objectives

We and MB REIT have not, and do not generally expect to focus property acquisitions in any one particular geographic location within the United States or Canada.  However, we and MB REIT generally endeavor to acquire multiple properties within the same major metropolitan market so that property management is done more efficiently.  We and MB REIT also seek properties with existing “net” leases.  “Net” leases require tenants to pay a share, either prorated or fixed, of all, or a majority, of a particular property's operating expenses, including real estate taxes, special assessments, utilities, insurance, common area maintenance and building repairs, as well as base rent payments.  We and MB REIT also may enter into purchase and leaseback transactions in which we or MB REIT will purchase a property and lease the property back to the seller.

To provide us and MB REIT with a competitive advantage over other potential purchasers, we and MB REIT generally do not condition any acquisition on our or MB REIT's ability to secure financing.  We and MB REIT also may agree to acquire a property once construction is completed.  In this case, we or MB REIT will be obligated to purchase the property if the completed property conforms to definitive plans, specifications and costs approved by us or MB REIT.  We and MB REIT also may condition the acquisition of a property on  the developer having signed leases for a certain percentage of the property.  We also may construct or develop properties and render services in connection with developing or constructing the property so long as providing these services do not cause us to lose our qualification to be taxed as a real estate investment trust or REIT.

We also may seek to acquire publicly traded or privately owned entities that own commercial real estate assets.  These entities may include REITs and other “real estate operating companies,” such as real estate management companies and real estate development companies.  We do not have, and do not expect to adopt, any policies limiting our acquisitions of REITs or other real estate operating companies to those conducting a certain type of real estate business or owning a specific property type or real estate asset.  In most cases, we evaluate the feasibility of acquiring these entities using the same criteria we use in evaluating a particular property.  We expect that each acquired entity will be operated as either a wholly-owned or controlled subsidiary.  We may acquire these entities in negotiated transactions or through tender offers.  Any acquisition must, however, be consistent with maintaining our qu alification to be taxed as a REIT.  MB REIT does not intend to buy entities.  MB REIT has a right of first refusal on all fee simple interests proposed to be acquired by  Inland American until MB REIT is fully invested.

We and MB REIT consider a number of factors in evaluating whether to acquire any particular asset, including:

·

geographic location and property type;

·

condition and use of the asset;

·

historical performance;

·

current and projected cash flow;

·

potential for capital appreciation;

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·

potential for economic growth in the area where the asset is located;

·

presence of existing and potential competition;

·

prospects for liquidity through sale, financing or refinancing of the asset; and

·

tax considerations.

We and MB REIT routinely borrow money to acquire real estate assets either at closing or at sometime thereafter.  These borrowings may take the form of temporary, interim or permanent financing provided by banks, institutional investors and other lenders including lenders affiliated with our sponsor, us or MB REIT. These borrowings generally are secured solely by a mortgage on one or more of our or MB REIT's properties but also may require us or MB REIT to be directly or indirectly (through a guarantee) liable for the borrowings.  We and MB REIT may borrow at either fixed or variable interest rates and on terms that require us or MB REIT to repay the principal on a typical, level schedule or at one-time in “balloon” payments.  We also may establish a revolving line of credit for short-term cash management and bridge financing purposes.

We and MB REIT are subject to significant competition in seeking real estate investments and tenants.  We and MB REIT compete for properties and tenants with many third parties engaged in real estate investment activities including other REITs, including those sponsored by our sponsor, specialty finance companies, insurance companies, mutual funds, institutional investors, hedge funds, and other entities.  Some of these entities have substantially greater financial resources and may enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies.

Properties and Investments

Joint Ventures

During the second quarter of 2006, we entered into joint ventures in which we have an ownership interest of 67% in each of the eight limited liability companies, herein referred to as the LLCs which own eight single tenant retail shopping centers. The LLC Properties are located in Connecticut, Massachusetts, New Jersey, Rhode Island, and South Carolina, and are 100% occupied as of September 30, 2006.  In the first quarter of 2006, we entered into a joint venture in which we have an ownership interest of 75% in a limited liability company which owns Hyde Park Shopping Center. These entities are considered variable interest entities or "VIE's" as defined in FIN 46(R) and we are considered the primary beneficiary.  Therefore, these entities are consolidated by us and the assets, liabilities, equity and results of operations are consolidated in our financial statements and discussions contained herein.  The eight LLC Propert ies and Hyde Park Shopping Center are herein referred to as the JV Properties.

Inland American entered into a joint venture during the fourth quarter 2005 with Minto Delaware, a privately held Florida corporation, pursuant to which we agreed to invest up to approximately $1,172,000 in a privately head REIT known as MB REIT.  Minto Delaware owns approximately $264,000 of Series A Preferred Stock in MB REIT as well as 23,000 shares of common stock.  As of September 30, 2006, we had invested approximately $450,000 in MB REIT resulting in us owning 352,667 shares of common stock or approximately 94% of MB REIT's outstanding common stock.

As part of our agreement with Minto Delaware, we were given the right to designate, and have designated, three persons (consisting of two of our directors and our principal financial officer) out of a five person board which oversees MB REIT.  Minto Delaware designates the other two board members.  We also agree that until we have made our entire $1,172,000 capital contribution, we would provide MB REIT with a right of first refusal on all fee interests in real property.  Thus, to date, all fee interests in real estate have been purchased by MB REIT although MB REIT's assets, liabilities and results of operations are consolidated into our financial statements.  We do not expect to directly purchase any fee interests in property until we have made all of our required capital contributions.

An entity similarly sponsored by Inland Real Estate Investment Corporation, Inland Western Retail Real Estate Investment Trust, Inc., (Inland Western) has also invested approximately $264,000 in Series C Preferred Stock of MB REIT.

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Inland American was required to purchase the remaining shares of MB REIT worth approximately $722,000 by December 31, 2006, however on October 27, 2006, the series A preferred shareholders have agreed to extend the obligation to March 31, 2007. In addition, MB REIT was obligated to repurchase the series C preferred in the amount of $264,000 by December 31, 2006, however the series A preferred shareholders have agreed to extend the obligation to January 31, 2007.

If we fail to make the required contributions to MB REIT by March 31, 2007, we will be in breach under the documents governing our investment in the MB REIT entitling Minto Delaware to, among other things, seek damages from us for breach.  Depending on the type of remedies obtained by Minto Delaware if we breach the various investment documents, we may not be able to account for our investment in the MB REIT by consolidating it into our financial statements, which could have a material adverse effect on our results of operations and financial condition.  Further, we may no longer be able to control the timing and amount of distributions from the MB REIT, which could have a material adverse effect on our ability to pay distributions.  If we fail to make the required contributions, we may, among other things, be required to pay monetary damages to Minto Delaware, which could have a material-adverse effect on our results of operation s, financial condition and ability to pay distributions.

For financial statement reporting purposes, we consolidate the assets, liabilities, equity and results of operations of MB REIT in our financial statements and discussions contained herein.  An adjustment is made for the interest of minority holders in MB REIT.

Marketable Securities

Inland American had investments in marketable securities of $148,933 at September 30, 2006 consisting of preferred and common stock investments in other REITs.  For the nine months ended September 30, 2006, Inland American realized a gain of $1,973 on the sale of shares, earned dividend income of $4,933 and recorded $8,766 of accumulated other comprehensive income.

We have invested a portion of our net proceeds from the offering of our common stock in marketable securities of other REITS.  Although these investments have generated both current income and gain on sale, during the three months and nine months ended September 30, 2006, there is no assurance that existing or future investments will generate the same level of income or gains in the future.

Investment Properties

As of September 30, 2006, we owned, on a consolidated basis, sixty-four properties consisting of fifty-four Retail Properties, seven Office Properties, one Multi-Family Property and two Industrial Properties.  The following disclosure describes by business segment, the location and character of these properties.  Title to each property is held by a wholly-owned subsidiary of MB REIT, except where indicated.

Retail Segment

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