Form: 10-K

Annual report pursuant to Section 13 and 15(d)

March 1, 2010

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
Commission file number 1-12672
AVALONBAY COMMUNITIES, INC.
(Exact name of registrant as specified in its charter)
 
     
Maryland
(State or other jurisdiction of
incorporation or organization)
  77-0404318
(I.R.S. Employer
Identification No.)
2900 Eisenhower Avenue, Suite 300
Alexandria, Virginia 22314
(Address of principal executive office)
(703) 329-6300
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
     
Common Stock, par value $.01 per share   New York Stock Exchange
     
(Title of each class)   (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes þ    No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o    No þ
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 twelve (12) months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ    No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ    No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o
        (Do not check if a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o    No þ
The aggregate market value of the registrant’s Common Stock, par value $.01 per share, held by nonaffiliates of the registrant, as of June 30, 2009 was $4,435,004,264.
The number of shares of the registrant’s Common Stock, par value $.01 per share, outstanding as of January 31, 2010 was 81,546,465.
Documents Incorporated by Reference
Portions of AvalonBay Communities, Inc.’s Proxy Statement for the 2010 annual meeting of stockholders, a definitive copy of which will be filed with the SEC within 120 days after the year end of the year covered by this Form 10-K, are incorporated by reference herein as portions of Part III of this Form 10-K.
 
 

 


 

TABLE OF CONTENTS
             
 
  PART I        
 
      PAGE
 
           
  BUSINESS     1  
 
           
  RISK FACTORS     8  
 
           
  UNRESOLVED STAFF COMMENTS     17  
 
           
  COMMUNITIES     17  
 
           
  LEGAL PROCEEDINGS     31  
 
           
  [RESERVED]     32  
 
           
 
  PART II        
 
           
  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES     33  
 
           
  SELECTED FINANCIAL DATA     35  
 
           
  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS     38  
 
           
  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK     58  
 
           
  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA     60  
 
           
  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
    60  
 
           
  CONTROLS AND PROCEDURES     60  
 
           
  OTHER INFORMATION     60  
 
           
 
  PART III        
 
           
  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE     61  
 
           
  EXECUTIVE COMPENSATION     61  
 
           
  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
    61  
 
           
  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPEND ENCE   62
 
           
  PRINCIPAL ACCOUNTING FEES AND SERVICES     62  
 
           
 
  PART IV        
 
           
  EXHIBITS, FINANCIAL STATEMENT SCHEDULE     63  
 
           
        70  

 


 

PART I
This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Our actual results could differ materially from those set forth in each forward-looking statement. Certain factors that might cause such a difference are discussed in this report, including in the section entitled “Forward-Looking Statements” included in this Form 10-K. You should also review Item 1a., “Risk Factors,” for a discussion of various risks that could adversely affect us.
ITEM 1.   BUSINESS
General
AvalonBay Communities, Inc. (the “Company,” which term, unless the context otherwise requires, refers to AvalonBay Communities, Inc. together with its subsidiaries) is a Maryland corporation that has elected to be treated as a real estate investment trust, (“REIT”), for federal income tax purposes. We engage in the development, redevelopment, acquisition, ownership and operation of multifamily communities in high barrier to entry markets of the United States. These barriers to entry generally include a difficult and lengthy entitlement process with local jurisdictions and dense urban or suburban areas where zoned and entitled land is in limited supply. Our markets are located in New England, the New York/New Jersey metro area, the Washington DC Metro area, the Midwest, the Pacific Northwest, and the Northern and Southern California regions of the United States. We focus on these markets because we believe that over the long-term, a limited new supply of apartment homes and lower housing affordability in these markets will result in higher growth in cash flows relative to other markets.
At January 31, 2010, we owned or held a direct or indirect ownership interest in:
  •   164 operating apartment communities containing 47,631 apartment homes in ten states and the District of Columbia, of which, 140 were consolidated communities containing 42,108 apartment homes, three communities containing 983 apartment homes were held by joint ventures in which we own an interest, and 21 communities containing 4,540 apartment homes were owned by the Funds (as defined below). Seven of the consolidated communities containing 2,615 apartment homes were under redevelopment, as discussed below;
  •   seven communities under construction that are expected to contain an aggregate of 2,438 apartment homes when completed; and
  •   rights to develop an additional 28 communities that, if developed in the manner expected, will contain an estimated 7,180 apartment homes.
We generally obtain ownership in an apartment community by developing a new community on vacant land or by acquiring an existing community. In selecting sites for development or acquisition, we favor locations that are near expanding employment centers and convenient to transportation, recreation areas, entertainment, shopping and dining.
Our consolidated real estate investments consist of the following reportable segments: Established Communities, Other Stabilized Communities and Development/Redevelopment Communities. Established Communities are generally operating communities that were owned and had stabilized occupancy and operating expenses as of the beginning of the prior year such that year-over-year comparisons are meaningful. Other Stabilized Communities are generally all other operating communities that have stabilized occupancy and operating expenses during the current year, but that had not achieved stabilization as of the beginning of the prior year such that year-over-year comparisons are not meaningful as well as communities that are planned for disposition during the current year. Development/Redevelopment Communities consist of communities that are under construction, communities where substantial redevelopment is in progress or is planned to begin during the current year and communities under lease-up. A more detailed description of these segments and other related information can be found in Note 9, “Segment Reporting,” of the Consolidated Financial Statements set forth in Item 8 of this report.
Our principal financial goal is to increase long-term stockholder value through the development, acquisition, operation and, when appropriate, disposition of apartments in our markets. To help fulfill this goal, we regularly (i) monitor our investment allocation by geographic market and product type, (ii) develop, redevelop and acquire an interest in apartment communities in high barrier to entry markets with growing or high potential for demand and

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high for-sale housing costs, (iii) selectively sell apartment communities that no longer meet our long-term strategy or when opportunities are presented to realize a portion of the value created through our investment and redeploy the proceeds from those sales, and (iv) endeavor to maintain a capital structure that is aligned with our business risks with a view to maintaining continuous access to cost-effective capital. Our time-tested strategy is to be leaders in customer insight, market research and capital allocation, delivering a range of multifamily offerings tailored to serve the needs of the most attractive customer segments in the best-performing US submarkets. A substantial majority of our current communities are upscale, which generally command among the highest rents in their markets. However, we also pursue the ownership and operation of apartment communities that target a variety of customer segments and price points, consistent with our goal of offering a broad range of products and services.
During the three years ended December 31, 2009, excluding activity for the Funds (as defined below), we acquired one apartment community. This community’s financial results are consolidated for financial reporting purposes. During the same three-year period, excluding dispositions in which we retained an ownership interest, we disposed of 19 apartment communities, disposed of one investment in a real estate joint venture and completed the development of 30 apartment communities and the redevelopment of 10 apartment communities.
During this period, we also realized gains from the sale of a community owned by AvalonBay Value Added Fund, L.P. (“Fund I”), an institutional discretionary investment fund, which we manage and in which we own a 15.2% interest. Fund I acquired communities with the objective of either redeveloping or repositioning them, or taking advantage of market cycle timing and improved operating performance. From its inception in March 2005 through the close of its investment period in March 2008, Fund I acquired 20 communities. Fund I sold one community in 2008.
In September 2008, we formed AvalonBay Value Added Fund II, L.P. (“Fund II”), an additional institutional discretionary investment fund which we manage and in which we currently own a 31.3% interest. After adding additional equity commitments in the second quarter of 2009, a total of five institutional investors and the Company collectively committed $400,000,000, of which our commitment is $125,000,000. During 2009, Fund II acquired two communities. A more detailed description of Fund I and Fund II (collectively, the “Funds”) and the related investment activity can be found in the discussion under Item I., “Business — General — Financing Strategy” and Note 6, “Investments in Real Estate Entities” of the Consolidated Financial Statements in Item 8 of this report.
During 2009, we sold seven real estate assets, resulting in a gain in accordance with U.S. generally accepted accounting principles (“GAAP”) of $65,946,000.
A further discussion of our development, redevelopment, disposition, acquisition, property management and related strategies follows.

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Development Strategy. We select land for development and follow established procedures that we believe minimize both the cost and the risks of development. As one of the largest developers of multifamily rental apartment communities in high barrier to entry markets of the United States, we identify development opportunities through local market presence and access to local market information achieved through our regional offices. In addition to our principal executive office in Alexandria, Virginia, we also maintain regional offices, administrative offices or specialty offices in or near the following cities:
  •   Boston, Massachusetts;
  •   Chicago, Illinois;
  •   Long Island, New York;
  •   Los Angeles, California;
  •   New York, New York;
  •   Newport Beach, California;
  •   San Francisco, California;
  •   San Jose, California;
  •   Seattle, Washington;
  •   Shelton, Connecticut;
  •   Virginia Beach, Virginia; and
  •   Woodbridge, New Jersey.
We will be moving our principal executive office to Arlington, Virginia by June 2010.
After selecting a target site, we usually negotiate for the right to acquire the site either through an option or a long-term conditional contract. Options and long-term conditional contracts generally allow us to acquire the target site shortly before the start of construction, which reduces development-related risks and preserves capital. However, as a result of competitive market conditions for land suitable for development, we have sometimes acquired and held land prior to construction for extended periods while entitlements are obtained, or acquired land zoned for uses other than residential with the potential for rezoning. For further discussion of our Development Rights, refer to Item 2., “Communities” in this report.
We generally act as our own general contractor and construction manager, except for certain mid-rise and high-rise apartment communities where we may elect to use third-party general contractors or construction managers. We generally perform these functions directly (although we may use a wholly owned subsidiary) both for ourselves and for the joint ventures and partnerships of which we are a member or a partner. We believe this enables us to achieve higher construction quality, greater control over construction schedules and significant cost savings. Our development, property management and construction teams monitor construction progress to ensure quality workmanship and a smooth and timely transition into the leasing and operating phase.
During periods where competition for development land is more intense, we may acquire improved land with existing commercial uses and rezone the site for multi-family residential use. During the period that we hold these buildings for future development, the net revenue from these operations, which we consider to be incidental, is accounted for as a reduction in our investment in the development pursuit and not as net income. We have also participated, and may in the future participate, in master planned or other large multi-use developments where we commit to build infrastructure (such as roads) to be used by other participants or commit to act as construction manager or general contractor in building structures or spaces for third parties (such as municipal garages or parks). Costs we incur in connection with these activities may be accounted for as additional invested capital in the community or we may earn fee income for providing these services. Particularly with large scale, urban in-fill developments, we may engage in significant environmental remediation efforts to prepare a site for construction.
Throughout this report, the term “development” is used to refer to the entire property development cycle, including pursuit of zoning approvals, procurement of architectural and engineering designs and the construction process. References to “construction” refer to the actual construction of the property, which is only one element of the development cycle.
Redevelopment Strategy. When we undertake the redevelopment of a community, our goal is to renovate and/or rebuild an existing community so that our total investment is generally below replacement cost and the community is well positioned in the market to achieve attractive returns on our capital. We have established a dedicated group

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of associates and procedures to control both the cost and risks of redevelopment. Our redevelopment teams, which include key redevelopment, construction and property management personnel, monitor redevelopment progress. We believe we achieve significant cost savings by acting as our own general contractor. More importantly, this helps to ensure quality design and workmanship and a smooth and timely transition into the lease-up and restabilization phases.
Throughout this report, the term “redevelopment” is used to refer to the entire redevelopment cycle, including planning and procurement of architectural and engineering designs, budgeting and actual renovation work. The actual renovation work is referred to as “reconstruction,” which is only one element of the redevelopment cycle.
Disposition Strategy. We sell assets that no longer meet our long-term strategy or when market conditions are favorable, and we redeploy the proceeds from those sales to develop, redevelop and acquire communities and to rebalance our portfolio across or within geographic regions. This also allows us to realize a portion of the value created through our investments and provides additional liquidity. We are then able to redeploy the net proceeds from our dispositions in lieu of raising that amount of capital externally. When we decide to sell a community, we solicit competing bids from unrelated parties for these individual assets and consider the sales price of each proposal.
Acquisition Strategy. Our core competencies in development and redevelopment discussed above allow us to be selective in the acquisitions we target. Acquisitions allow us to achieve rapid penetration into markets in which we desire an increased presence. Acquisitions (and dispositions) also help us achieve our desired product mix or rebalance our portfolio. In September 2008, we formed Fund II, which serves as the exclusive vehicle through which we acquire additional investments in apartment communities until the earlier of September 2011 or until 90% of its committed capital is invested, subject to limited exceptions. As of December 31, 2009, Fund II had acquired two communities.
Property Management Strategy. We seek to increase operating income through innovative, proactive property management that will result in higher revenue from communities while constraining operating expenses. Our principal strategies to maximize revenue include:
  •   strong focus on resident satisfaction;
  •   staggering lease terms such that lease expirations are better matched to traffic patterns;
  •   balancing high occupancy with premium pricing, and increasing rents as market conditions permit; and
  •   managing community occupancy for optimal rental revenue levels.
Constraining growth in operating expenses is another way in which we seek to increase earnings growth. Growth in our portfolio and the resulting increase in revenue allows for fixed operating costs to be spread over a larger volume of revenue, thereby increasing operating margins. We constrain growth in operating expenses in a variety of ways, which include the following, among others:
  •   we use purchase order controls, acquiring goods and services from pre-approved vendors;
  •   we purchase supplies in bulk where possible;
  •   we bid third-party contracts on a volume basis;
  •   we strive to retain residents through high levels of service in order to eliminate the cost of preparing an apartment home for a new resident and to reduce marketing and vacant apartment utility costs;
  •   we perform turnover work in-house or hire third parties, generally depending upon the least costly alternative;
  •   we undertake preventive maintenance regularly to maximize resident satisfaction and property and equipment life; and
  •   we aggressively pursue real estate tax appeals.
On-site property management teams receive bonuses based largely upon the net operating income (“NOI”) produced at their respective communities. We use and continuously seek ways to improve technology applications to help manage our communities, believing that the accurate collection of financial and resident data will enable us to maximize revenue and control costs through careful leasing decisions, maintenance decisions and financial management.

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We generally manage the operation and leasing activity of our communities directly (although we may use a wholly owned subsidiary) both for ourselves and the joint ventures and partnerships of which we are a member or a partner.
From time to time we also pursue or arrange ancillary services for our residents to provide additional revenue sources or increase resident satisfaction. In general, as a REIT we cannot directly provide services to our tenants that are not customarily provided by a landlord, nor can we share in the income of a third party that provides such services. However, we can provide such non-customary services to residents or share in the revenue from such services if we do so through a “taxable REIT subsidiary,” which is a subsidiary that is treated as a “C corporation” and is therefore subject to federal income taxes.
Financing Strategy. We maintain a capital structure that provides financial flexibility to ensure we can select cost effective capital market options that are well matched to our business risks. We estimate that our short-term liquidity needs will be met from cash on hand, borrowings under our $1,000,000,000 revolving variable rate unsecured credit facility (the “Credit Facility”), sales of current operating communities and/or issuance of additional debt or equity securities. A determination to engage in an equity or debt offering depends on a variety of factors such as general market and economic conditions, including interest rates, our short and long-term liquidity needs, the adequacy of our expected liquidity sources, the relative costs of debt and equity capital and growth opportunities. A summary of debt and equity activity for the last three years is reflected on our Consolidated Statement of Cash Flows of the Consolidated Financial Statements set forth in Item 8 of this report.
We have entered into, and may continue in the future to enter into, joint ventures (including limited liability companies or partnerships) through which we would own an indirect economic interest of less than 100% of the community or communities owned directly by such joint ventures. Our decision whether to hold an apartment community in fee simple or to have an indirect interest in the community through a joint venture is based on a variety of factors and considerations, including: (i) the economic and tax terms required by a seller of land or of a community; (ii) our desire to diversify our portfolio of communities by market, submarket and product type; (iii) our desire at times to preserve our capital resources to maintain liquidity or balance sheet strength; and (iv) our projection, in some circumstances, that we will achieve higher returns on our invested capital or reduce our risk if a joint venture vehicle is used. Investments in joint ventures are not limited to a specified percentage of our assets. Each joint venture agreement is individually negotiated, and our ability to operate and/or dispose of a community in our sole discretion may be limited to varying degrees depending on the terms of the joint venture agreement.
From its inception in 2005 until the investment period closed in March 2008, Fund I was the exclusive vehicle through which we invested in the acquisition of apartment communities, subject to certain exceptions. In September 2008, we formed Fund II. Fund II now serves as the exclusive vehicle through which we invest in the acquisition of apartment communities, subject to certain exceptions, until the earlier of September 2011 or until 90% of its committed capital is invested. These exceptions include significant individual asset and portfolio acquisitions, properties acquired in tax-deferred transactions and acquisitions that are inadvisable or inappropriate for Fund II. Fund II does not restrict our development activities, and will terminate after a term of ten years, subject to two one-year extensions. Fund II has equity commitments from five institutional investors who, with the Company, collectively committed $400,000,000, of which our commitment is $125,000,000. A significant portion of the investments made in the Funds by investors have been or will be made through an entity that qualifies, or that will qualify as a REIT and in which we also own an equity interest. As of January 31, 2010, Fund II has made two investments, for a total of $104,330,000 invested. In February 2010, Fund II purchased its third community for a purchase price of $31,250,000.
In addition, we may, from time to time, offer shares of our equity securities, debt securities or options to purchase stock in exchange for property.
Other Strategies and Activities. While we emphasize equity real estate investments in rental apartment communities, we have the ability to invest in other types of real estate, mortgages (including participating or convertible mortgages), securities of other REITs or real estate operating companies, or securities of technology companies that relate to our real estate operations or of companies that provide services to us or our residents, in each case consistent with our qualification as a REIT. In addition, we own and lease retail space at our communities when either (i) the highest and best use of the space is for retail (e.g., street level in an urban area) or (ii) we believe the retail space will enhance the attractiveness of the community to residents. As of December 31, 2009, we had a

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total of 456,260 square feet of rentable retail space, excluding retail space within communities currently under construction. Gross rental revenue provided by leased retail space in 2009 was $8,915,000 (1.0% of total revenue). If we secure a development right and believe that its best use, in whole or in part, is to develop the real estate with the intent to sell rather than hold the asset, we may, through a taxable REIT subsidiary, develop real estate for sale. At present, through a taxable REIT subsidiary that is a 50% partner in Aria at Hathorne, LLC, we have an economic interest in the development of for-sale town homes that have a total projected capital cost of $23,621,000. This for-sale development is on a site that is adjacent to our Avalon Danvers community and that is zoned for for-sale development. Any investment in securities of other entities, and any development of real estate for sale, is subject to the percentage of ownership limitations, gross income tests, and other limitations that must be observed for REIT qualification.
We have not engaged in trading, underwriting or agency distribution or sale of securities of other issuers and do not intend to do so. At all times we intend to make investments in a manner so as to qualify as a REIT unless, because of circumstances or changes to the Internal Revenue Code (or the Treasury Regulations), our Board of Directors determines that it is no longer in our best interest to qualify as a REIT.
Tax Matters
We filed an election with our 1994 federal income tax return to be taxed as a REIT under the Internal Revenue Code of 1986 (“the Code”), as amended, and intend to maintain our qualification as a REIT in the future. As a qualified REIT, with limited exceptions, we will not be taxed under federal and certain state income tax laws at the corporate level on our taxable net income to the extent taxable net income is distributed to our stockholders. We expect to make sufficient distributions to avoid income tax at the corporate level. While we believe that we are organized and qualified as a REIT and we intend to operate in a manner that will allow us to continue to qualify as a REIT, there can be no assurance that we will be successful in this regard. Qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code for which there are limited judicial and administrative interpretations and involves the determination of a variety of factual matters and circumstances not entirely within our control.
Competition
We face competition from other real estate investors, including insurance companies, pension and investment funds, partnerships and investment companies and other REITs, to acquire and develop apartment communities and acquire land for future development. As an owner and operator of apartment communities, we also face competition for prospective residents from other operators whose communities may be perceived to offer a better location or better amenities or whose rent may be perceived as a better value given the quality, location and amenities that the resident seeks. We also compete against condominiums and single-family homes that are for sale or rent. Although we often compete against large sophisticated developers and operators for development opportunities and for prospective residents, real estate developers and operators of any size can provide effective competition for both real estate assets and potential residents.
Environmental and Related Matters
As a current or prior owner, operator and developer of real estate, we are subject to various federal, state and local environmental laws, regulations and ordinances and also could be liable to third parties resulting from environmental contamination or noncompliance at our communities. For some development communities, we undertake extensive environmental remediation to prepare the site for construction, which could be a significant portion of our total construction cost. Environmental remediation efforts could expose us to possible liabilities for accidents or improper handling of contaminated materials during construction. These and other risks related to environmental matters are described in more detail in Item 1a., “Risk Factors”.
We believe that more government regulation of energy use, along with a greater focus on environmental protection may, over time, have a significant impact on urban growth patterns. If changes in zoning to encourage greater density and proximity to mass transit do occur, such changes could benefit multifamily housing and those companies with a competency in high-density development. However, there can be no assurance as to whether or

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when such changes in regulations or zoning will occur or, if they do occur, whether the multifamily industry or the Company will benefit from such changes.
Other Information
We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any document we file at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may call the SEC at 1-202-551-8090 for further information on the operation of the Public Reference Room. Our SEC filings are also available to the public from the SEC’s website at www.sec.gov. In addition, you may read our SEC fillings at the offices of the New York Stock Exchange (“NYSE”), which is located at 11 Wall Street, New York, New York 10005. Our SEC filings are available at the NYSE because our common stock is listed on the NYSE.
We maintain a website at www.avalonbay.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to the Securities Exchange Act of 1934 are available free of charge in the “Investor Relations” section of our website as soon as reasonably practicable after the reports are filed with or furnished to the SEC. In addition, the charters of our Board’s Nominating and Corporate Governance Committee, Audit Committee and Compensation Committee, as well as our Corporate Governance Guidelines and Code of Conduct, are available free of charge in that section of our website or by writing to AvalonBay Communities, Inc., 2900 Eisenhower Avenue, Suite 300, Alexandria, Virginia 22314, Attention: Chief Financial Officer. To the extent required by the rules of the SEC and the NYSE, we will disclose amendments and waivers relating to these documents in the same place on our website.
We were incorporated under the laws of the State of California in 1978. In 1995, we reincorporated in the State of Maryland and have been focused on the ownership and operation of apartment communities since that time. As of January 31, 2010, we had 1,877 employees.

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ITEM 1a. RISK FACTORS
Our operations involve various risks that could have adverse consequences, including those described below. This Item 1a. includes forward-looking statements. You should refer to our discussion of the qualifications and limitations on forward-looking statements in this Form 10-K.
Development, redevelopment and construction risks could affect our profitability.
We intend to continue to develop and redevelop apartment home communities. These activities can include long planning and entitlement timelines and can involve complex and costly activities, including significant environmental remediation or construction work in high-density urban areas. These activities may be exposed to the following risks:
  •   we may abandon opportunities that we have already begun to explore for a number of reasons, including changes in local market conditions or increases in construction or financing costs, and, as a result, we may fail to recover expenses already incurred in exploring those opportunities;
  •   occupancy rates and rents at a community may fail to meet our original expectations for a number of reasons, including changes in market and economic conditions beyond our control and the development by competitors of competing communities;
  •   we may be unable to obtain, or experience delays in obtaining, necessary zoning, occupancy, or other required governmental or third party permits and authorizations, which could result in increased costs or the delay or abandonment of opportunities;
  •   we may incur costs that exceed our original estimates due to increased material, labor or other costs;
  •   occupancy rates and rents at a community may fail to meet our expectations for a number of reasons, including changes in market and economic conditions beyond our control and the development by competitors of competing communities;
  •   we may be unable to complete construction and lease-up of a community on schedule, resulting in increased construction and financing costs and a decrease in expected rental revenues;
  •   we may be unable to obtain financing with favorable terms, or at all, for the proposed development of a community, which may cause us to delay or abandon an opportunity;
  •   we may incur liabilities to third parties during the development process, for example, in connection with managing existing improvements on the site prior to tenant terminations and demolition (such as commercial space) or in connection with providing services to third parties (such as the construction of shared infrastructure or other improvements); and
  •   we may incur liability if our communities are not constructed and operated in compliance with the accessibility provisions of the Americans with Disabilities Acts, the Fair Housing Act or other federal, state or local requirements. Noncompliance could result in imposition of fines, an award of damages to private litigants, and a requirement that we undertake structural modifications to remedy the noncompliance. We are currently engaged in litigation alleging noncompliance with these statutes. See Item 3., “Legal Proceedings.”
We project construction costs based on market conditions at the time we prepare our budgets, and our projections include changes that we anticipate but cannot predict with certainty. Construction costs may increase, particularly for labor and certain materials and, for some of our Development Communities and Development Rights (as defined below), the total construction costs may be higher than the original budget. Total capitalized cost includes all capitalized costs incurred and projected to be incurred to develop or redevelop a community, determined in accordance with GAAP, including:
  •   land and/or property acquisition costs;
  •   fees paid to secure air rights and/or tax abatements;
  •   construction or reconstruction costs;
  •   costs of environmental remediation;
  •   real estate taxes;
  •   capitalized interest;

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  •   loan fees;
 
  •   permits;
  •   professional fees;
  •   allocated development or redevelopment overhead; and
  •   other regulatory fees.
Costs to redevelop communities that have been acquired have, in some cases, exceeded our original estimates and similar increases in costs may be experienced in the future. We cannot assure you that market rents in effect at the time new development or redevelopment communities complete lease-up will be sufficient to fully offset the effects of any increased construction or reconstruction costs.
Unfavorable changes in market and economic conditions could hurt occupancy, rental rates, operating expenses, and the overall market value of our assets, including joint ventures and investments in the Funds.
Local conditions in our markets significantly affect occupancy, rental rates and the operating performance of our communities. The risks that may adversely affect conditions in those markets include the following:
  •   plant closings, industry slowdowns and other factors that adversely affect the local economy;
  •   an oversupply of, or a reduced demand for, apartment homes;
  •   a decline in household formation or employment or lack of employment growth;
  •   the inability or unwillingness of residents to pay rent increases;
  •   rent control or rent stabilization laws, or other laws regulating housing, that could prevent us from raising rents to offset increases in operating costs; and
  •   economic conditions that could cause an increase in our operating expenses, such as increases in property taxes, utilities, compensation of on-site associates and routine maintenance.
Changes in applicable laws, or noncompliance with applicable laws, could adversely affect our operations or expose us to liability.
We must develop, construct and operate our communities in compliance with numerous federal, state and local laws and regulations, some of which may conflict with one another or be subject to limited judicial or regulatory interpretations. These laws and regulations may include zoning laws, building codes, landlord tenant laws and other laws generally applicable to business operations. Noncompliance with laws could expose us to liability.
Lower revenue growth or significant unanticipated expenditures may result from our need to comply with changes in (i) laws imposing remediation requirements and the potential liability for environmental conditions existing on properties or the restrictions on discharges or other conditions, (ii) rent control or rent stabilization laws or other residential landlord/tenant laws, or (iii) other governmental rules and regulations or enforcement policies affecting the development, use and operation of our communities, including changes to building codes and fire and life-safety codes.
Short-term leases expose us to the effects of declining market rents.
Substantially all of our apartment leases are for a term of one year or less. Because these leases generally permit the residents to leave at the end of the lease term without penalty, our rental revenues are impacted by declines in market rents more quickly than if our leases were for longer terms.
Competition could limit our ability to lease apartment homes or increase or maintain rents.
Our apartment communities compete with other housing alternatives to attract residents, including other rental apartments, condominiums and single-family homes that are available for rent, as well as new and existing condominiums and single-family homes for sale. Competitive residential housing in a particular area could adversely affect our ability to lease apartment homes and to increase or maintain rental rates.

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Attractive investment opportunities may not be available, which could adversely affect our profitability.
We expect that other real estate investors, including insurance companies, pension funds, other REITs and other well-capitalized investors, will compete with us to acquire existing properties and to develop new properties. This competition could increase prices for properties of the type we would likely pursue and adversely affect our profitability.
Capital and credit market conditions may adversely affect our access to various sources of capital and/or the cost of capital, which could impact our business activities, dividends, earnings, and common stock price, among other things.
In periods when the capital and credit markets experience significant volatility, the amounts, sources and cost of capital available to us may be adversely affected. We primarily use external financing to fund construction and to refinance indebtedness as it matures. If sufficient sources of external financing are not available to us on cost effective terms, we could be forced to limit our development and redevelopment activity and/or take other actions to fund our business activities and repayment of debt, such as selling assets, reducing our cash dividend or paying out less than 100% of our taxable income. To the extent that we are able and/or choose to access capital at a higher cost than we have experienced in recent years (reflected in higher interest rates for debt financing or a lower stock price for equity financing) our earnings per share and cash flows could be adversely affected. In addition, the price of our common stock may fluctuate significantly and/or decline in a high interest rate or volatile economic environment. We believe that the lenders under our Credit Facility will fulfill their lending obligations thereunder, but if economic conditions deteriorate there can be no assurance that the ability of those lenders to fulfill their obligations would not be adversely impacted.
Insufficient cash flow could affect our debt financing and create refinancing risk.
We are subject to the risks associated with debt financing, including the risk that our cash flow will be insufficient to meet required payments of principal and interest. In this regard, we note that in order for us to continue to qualify as a REIT, we are required to annually distribute dividends generally equal to at least 90% of our REIT taxable income, computed without regard to the dividends paid deduction and our net capital gain. This requirement limits the amount of our cash flow available to meet required principal and interest payments. The principal outstanding balance on a portion of our debt will not be fully amortized prior to its maturity. Although we may be able to repay our debt by using our cash flows, we cannot assure you that we will have sufficient cash flows available to make all required principal payments. Therefore, we may need to refinance at least a portion of our outstanding debt as it matures. There is a risk that we may not be able to refinance existing debt or that a refinancing will not be done on as favorable terms, either of which could have a material adverse effect on our financial condition and results of operations.
Rising interest rates could increase interest costs and could affect the market price of our common stock.
We currently have, and may in the future incur, contractual variable interest rate debt, as well as effective variable interest rate debt achieved through the use of qualifying hedging relationships. In addition, we regularly seek access to both fixed and variable rate debt financing to repay maturing debt and to finance our development and redevelopment activity. Accordingly, if interest rates increase, our interest costs will also rise, unless we have made arrangements that hedge the risk of rising interest rates. In addition, an increase in market interest rates may lead purchasers of our common stock to demand a greater annual dividend yield, which could adversely affect the market price of our common stock.

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Bond financing and zoning compliance requirements could limit our income, restrict the use of communities and cause favorable financing to become unavailable.
We have financed some of our apartment communities with obligations issued by local government agencies because the interest paid to the holders of this debt is generally exempt from federal income taxes and, therefore, the interest rate is generally more favorable to us. These obligations are commonly referred to as “tax-exempt bonds” and generally must be secured by mortgages on our communities. As a condition to obtaining tax-exempt financing, or on occasion as a condition to obtaining favorable zoning in some jurisdictions, we will commit to make some of the apartments in a community available to households whose income does not exceed certain thresholds (e.g., 50% or 80% of area median income), or who meet other qualifying tests. As of December 31, 2009, approximately 6.8% of our apartment homes at current operating communities were under income limitations such as these. These commitments, which may run without expiration or may expire after a period of time (such as 15 or 20 years) may limit our ability to raise rents and, in consequence, can also adversely affect the value of the communities subject to these restrictions.
In addition, some of our tax-exempt bond financing documents require us to obtain a guarantee from a financial institution of payment of the principal of, and interest on, the bonds. The guarantee may take the form of a letter of credit, surety bond, guarantee agreement or other additional collateral. If the financial institution defaults in its guarantee obligations, or if we are unable to renew the applicable guarantee or otherwise post satisfactory collateral, a default will occur under the applicable tax-exempt bonds and the community could be foreclosed upon if we do not redeem the bonds.
Risks related to indebtedness.
We have a Credit Facility with JPMorgan Chase Bank, N.A., and Wachovia Bank, N.A., serving together as syndication agent and as banks, Bank of America, N.A., serving as administrative agent, swing lender, issuing bank and a bank, Morgan Stanley Bank, Wells Fargo Bank, N.A., and Deutsche Bank Trust Company Americas, serving collectively as documentation agent and as banks, and a syndicate of other financial institutions, serving as banks. Our organizational documents do not limit the amount or percentage of indebtedness that may be incurred. Accordingly, subject to compliance with outstanding debt covenants, we could incur more debt, resulting in an increased risk of default on our obligations and an increase in debt service requirements that could adversely affect our financial condition and results of operations.
The mortgages on those of our properties subject to secured debt, our Credit Facility and the indenture under which a substantial portion of our debt was issued contain customary restrictions, requirements and other limitations, as well as certain financial and operating covenants including maintenance of certain financial ratios. Maintaining compliance with these restrictions could limit our flexibility. A default in these requirements, if uncured, could result in a requirement that we repay indebtedness, which could severely affect our liquidity and increase our financing costs. Refer to Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for further discussion.
Failure to generate sufficient revenue or other liquidity needs could limit cash flow available for distributions to stockholders.
A decrease in rental revenue or other liquidity needs, including the repayment of indebtedness or funding of our development activities, could have an adverse effect on our ability to pay distributions to our stockholders. Significant expenditures associated with each community such as debt service payments, if any, real estate taxes, insurance and maintenance costs are generally not reduced when circumstances cause a reduction in income from a community.
The form, timing and/or amount of dividend distributions in future periods may vary and be impacted by economic and other considerations.
The form, timing and/or amount of dividend distributions will be declared at the discretion of the Board of Directors and will depend on actual cash from operations, our financial condition, capital requirements, the annual

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distribution requirements under the REIT provisions of the Code and other factors as the Board of Directors may consider relevant. The Board of Directors may modify our dividend policy from time to time.
We may choose to pay dividends in our own stock, in which case stockholders may be required to pay tax in excess of the cash they receive.
We may distribute taxable dividends that are payable in part in our stock, as we did in the fourth quarter of 2008. Taxable stockholders receiving such dividends will be required to include the full amount of the dividend as income to the extent of our current and accumulated earnings and profits for federal income tax purposes. As a result, a U.S. stockholder may be required to pay tax with respect to such dividends in excess of the cash received. If a U.S. stockholder sells the stock it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, with respect to non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock. In addition, the trading price of our stock would experience downward pressure if a significant number of our stockholders sell shares of our stock in order to pay taxes owed on dividends. .
Debt financing may not be available and equity issuances could be dilutive to our stockholders.
Our ability to execute our business strategy depends on our access to an appropriate blend of debt and equity financing. Debt financing may not be available in sufficient amounts or on favorable terms. If we issue additional equity securities, the interests of existing stockholders could be diluted.
Difficulty of selling apartment communities could limit flexibility.
Federal tax laws may limit our ability to earn a gain on the sale of a community (unless we own it through a subsidiary which will incur a taxable gain upon sale) if we are found to have held, acquired or developed the community primarily with the intent to resell the community, and this limitation may affect our ability to sell communities without adversely affecting returns to our stockholders. In addition, real estate in our markets can at times be difficult to sell quickly at prices we find acceptable. These potential difficulties in selling real estate in our markets may limit our ability to change or reduce the apartment communities in our portfolio promptly in response to changes in economic or other conditions.
Acquisitions may not yield anticipated results.
Subject to the requirements related to Fund II, we may in the future acquire apartment communities on a select basis. Our acquisition activities and their success may be exposed to the following risks:
  •   an acquired property may fail to perform as we expected in analyzing our investment; and
  •   our estimate of the costs of repositioning or redeveloping an acquired property may prove inaccurate.
Failure to succeed in new markets or in activities other than the development, ownership and operation of residential rental communities may have adverse consequences.
We may from time to time commence development activity or make acquisitions outside of our existing market areas if appropriate opportunities arise. As noted above, we also own and lease ancillary retail space when a retail component represents the best use of the space, as is often the case with large urban in-fill developments. Also, as noted above in Item 1., “Business,” through a taxable REIT subsidiary that is a joint venture partner, we have a 50% economic interest in a for-sale development with a total estimated capital cost at completion of $23,621,000, on a site adjacent to one of our communities. We may engage or have an interest in for-sale activity in the future. Our historical experience in our existing markets in developing, owning and operating rental communities does not ensure that we will be able to operate successfully in new markets, should we choose to enter them, or that we will be successful in other activities. We may be exposed to a variety of risks if we choose to enter new markets, including an inability to accurately evaluate local apartment market conditions; an inability to obtain land for development or to identify appropriate acquisition opportunities; an inability to hire and retain key personnel; and

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lack of familiarity with local governmental and permitting procedures. We may be unsuccessful in owning and leasing retail space at our communities or in developing real estate with the intent to sell.
Land we hold with no current intent to develop may be subject to future impairment charges
We own parcels of land that we do not currently intend to develop. As discussed in Item 2., “Communities — Other Land and Real Estate Assets,” in the event that the fair market value of a parcel changes such that the we determine that the carrying basis of the parcel reflected in our financial statements is greater than the parcel’s then current fair value, less costs to dispose, we would be subject to an impairment charge, which would reduce our net income.
Risks involved in real estate activity through joint ventures.
Instead of acquiring or developing apartment communities directly, at times we invest as a partner or a co-venturer. Joint venture investments (including investments through partnerships or limited liability companies) involve risks, including the possibility that our partner might become insolvent or otherwise refuse to make capital contributions when due; that we may be responsible to our partner for indemnifiable losses; that our partner might at any time have business goals which are inconsistent with ours; and that our partner may be in a position to take action or withhold consent contrary to our instructions or requests. Frequently, we and our partner may each have the right to trigger a buy-sell arrangement, which could cause us to sell our interest, or acquire our partner’s interest, at a time when we otherwise would not have initiated such a transaction.
Risks associated with an investment in and management of discretionary investment funds.
We formed Fund I which, through a wholly owned subsidiary, we manage as the general partner and in which we have invested approximately $50,000,000 at December 31, 2009, representing our total capital commitment, for an equity interest of approximately 15%. We have also formed Fund II which, through a wholly owned subsidiary, we manage as the general partner and to which we have committed $125,000,000, representing a current equity interest of approximately 31%. We have invested approximately $17,500,000 at December 31, 2009 in Fund II. These Funds present risks, including the following:
  •   investors in Fund II may fail to make their capital contributions when due and, as a result, Fund II may be unable to execute its investment objectives;
  •   our subsidiaries that are the general partners of the Funds are generally liable, under partnership law, for the debts and obligations of the respective Funds, subject to certain exculpation and indemnification rights pursuant to the terms of the partnership agreement of the Funds;
  •   investors in the Funds holding a majority of the partnership interests may remove us as the general partner without cause, subject to our right to receive an additional nine months of management fees after such removal and our right to acquire one of the properties then held by the Funds;
  •   while we have broad discretion to manage the Funds and make investment decisions on behalf of the Funds, the investors or an advisory committee comprised of representatives of the investors must approve certain matters, and as a result we may be unable to cause the Funds to make certain investments or implement certain decisions that we consider beneficial;
  •   we can develop communities but have been generally prohibited from making acquisitions of apartment communities outside of Fund II, which is our exclusive investment vehicle until September 2011 or when 90% of Fund II’s capital is invested, subject to certain exceptions; and
  •   we may be liable and/or our status as a REIT may be jeopardized if either the Funds, or the REITs through which a number of investors have invested in the Funds and which we manage, fail to comply with various tax or other regulatory matters.
Risk of earthquake damage.
As further described in Item 2., “Communities — Insurance and Risk of Uninsured Losses,” many of our West Coast communities are located in the general vicinity of active earthquake faults. We cannot assure you that an earthquake would not cause damage or losses greater than insured levels. In the event of a loss in excess of insured limits, we could lose our capital invested in the affected community, as well as anticipated future revenue from that community. We would also continue to be obligated to repay any mortgage indebtedness or other obligations related to the community. Any such loss could materially and adversely affect our business and our financial condition and results of operations.
Insurance coverage for earthquakes can be costly due to limited industry capacity. As a result, we may experience shortages in desired coverage levels if market conditions are such that insurance is not available or the cost of insurance makes it, in management’s view, economically impractical.

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A significant uninsured property or liability loss could have a material adverse effect on our financial condition and results of operations.
In addition to the earthquake insurance discussed above, we carry commercial general liability insurance, property insurance and terrorism insurance with respect to our communities on terms we consider commercially reasonable. There are, however, certain types of losses (such as losses arising from acts of war) that are not insured, in full or in part, because they are either uninsurable or the cost of insurance makes it, in management’s view, economically impractical. If an uninsured property loss or a property loss in excess of insured limits were to occur, we could lose our capital invested in a community, as well as the anticipated future revenues from such community. We would also continue to be obligated to repay any mortgage indebtedness or other obligations related to the community. If an uninsured liability to a third party were to occur, we would incur the cost of defense and settlement with, or court ordered damages to, that third party. A significant uninsured property or liability loss could materially and adversely affect our business and our financial condition and results of operations.
We may incur costs and increased expenses to repair property damage resulting from inclement weather.
Particularly in New England and the Midwest, we are exposed to risks associated with inclement winter weather, including increased costs for the removal of snow and ice as well as from delays in construction. In addition, inclement weather could increase the need for maintenance and repair of our communities.
We may incur costs due to environmental contamination or non-compliance.
Under various federal, state and local environmental and public health laws, regulations and ordinances, we may be required, regardless of knowledge or responsibility, to investigate and remediate the effects of hazardous or toxic substances or petroleum product releases at our properties (including in some cases natural substances such as methane and radon gas) and may be held liable under these laws or common law to a governmental entity or to third parties for property, personal injury or natural resources damages and for investigation and remediation costs incurred as a result of the contamination. These damages and costs may be substantial and may exceed any insurance coverage we have for such events. The presence of such substances, or the failure to properly remediate the contamination, may adversely affect our ability to borrow against, sell or rent the affected property.
In addition, some environmental laws create or allow a government agency to impose a lien on the contaminated site in favor of the government for damages and costs it incurs as a result of the contamination.
The development, construction and operation of our communities are subject to regulations and permitting under various federal, state and local laws, regulations and ordinances, which regulate matters including wetlands protection, storm water runoff and wastewater discharge. Noncompliance with such laws and regulations may subject us to fines and penalties. We do not currently anticipate that we will incur any material liabilities as a result of noncompliance with these laws.
Certain federal, state and local laws, regulations and ordinances govern the removal, encapsulation or disturbance of asbestos containing materials (“ACMs”) when such materials are in poor condition or in the event of renovation or demolition of a building. These laws and the common law may impose liability for release of ACMs and may allow third parties to seek recovery from owners or operators of real properties for personal injury associated with exposure to ACMs. We are not aware that any ACMs were used in the construction of the communities we developed. ACMs were, however, used in the construction of a number of the communities that we acquired. We implement an operations and maintenance program at each of the communities at which ACMs are detected. We do not currently anticipate that we will incur any material liabilities as a result of the presence of ACMs at our communities.
We are aware that some of our communities have lead paint and have implemented an operations and maintenance program at each of those communities. We do not currently anticipate that we will incur any material liabilities as a result of the presence of lead paint at our communities.

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All of our stabilized operating communities, and all of the communities that we are currently developing, have been subjected to at least a Phase I or similar environmental assessment, which generally does not involve invasive techniques such as soil or ground water sampling. These assessments, together with subsurface assessments conducted on some properties, have not revealed, and we are not otherwise aware of, any environmental conditions that we believe would have a material adverse effect on our business, assets, financial condition or results of operations. In connection with our ownership, operation and development of communities, from time to time we undertake substantial remedial action in response to the presence of subsurface or other contaminants, including contaminants in soil, groundwater and soil vapor beneath or affecting our buildings. In some cases, an indemnity exists upon which we may be able to rely if environmental liability arises from the contamination or remediation costs exceed estimates. There can be no assurance, however, that all necessary remediation actions have been or will be undertaken at our properties or that we will be indemnified, in full or at all, in the event that environmental liability arises.
Mold growth may occur when excessive moisture accumulates in buildings or on building materials, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Although the occurrence of mold at multifamily and other structures, and the need to remediate such mold, is not a new phenomenon, there has been increased awareness in recent years that certain molds may in some instances lead to adverse health effects, including allergic or other reactions. To help limit mold growth, we educate residents about the importance of adequate ventilation and request or require that they notify us when they see mold or excessive moisture. We have established procedures for promptly addressing and remediating mold or excessive moisture from apartment homes when we become aware of its presence regardless of whether we or the resident believe a health risk is presented. However, we cannot provide assurance that mold or excessive moisture will be detected and remediated in a timely manner. If a significant mold problem arises at one of our communities, we could be required to undertake a costly remediation program to contain or remove the mold from the affected community and could be exposed to other liabilities that may exceed any applicable insurance coverage. Our communities may also be affected by potential vapor intrusion risks resulting from subsurface soil or groundwater contamination by volatile organic compounds, which may require investigation or remediation and could subject the Company to liability.
Additionally, we have occasionally been involved in developing, managing, leasing and operating various properties for third parties. Consequently, we may be considered to have been an operator of such properties and, therefore, potentially liable for removal or remediation costs or other potential costs which relate to the release or presence of hazardous or toxic substances. We are not aware of any material environmental liabilities with respect to properties managed or developed by us or our predecessors for such third parties.
We cannot assure you that:
  •   the environmental assessments described above have identified all potential environmental liabilities;
  •   no prior owner created any material environmental condition not known to us or the consultants who prepared the assessments;
  •   no environmental liabilities have developed since the environmental assessments were prepared;
  •   the condition of land or operations in the vicinity of our communities, such as the presence of underground storage tanks, will not affect the environmental condition of our communities;
  •   future uses or conditions, including, without limitation, changes in applicable environmental laws and regulations, will not result in the imposition of environmental liability; and
  •   no environmental liabilities will arise at communities that we have sold for which we may have liability.
Failure to qualify as a REIT would cause us to be taxed as a corporation, which would significantly reduce funds available for distribution to stockholders.
If we fail to qualify as a REIT for federal income tax purposes, we will be subject to federal income tax on our taxable income at regular corporate rates (subject to any applicable alternative minimum tax). In addition, unless we are entitled to relief under applicable statutory provisions, we would be ineligible to make an election for treatment as a REIT for the four taxable years following the year in which we lose our qualification. The additional tax liability resulting from the failure to qualify as a REIT would significantly reduce or eliminate the amount of funds available for distribution to our stockholders. Furthermore, we would no longer be required to make distributions to

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our stockholders. Thus, our failure to qualify as a REIT could also impair our ability to expand our business and raise capital, and would adversely affect the value of our common stock.
We believe that we are organized and qualified as a REIT, and we intend to operate in a manner that will allow us to continue to qualify as a REIT. However, we cannot assure you that we are qualified as a REIT, or that we will remain qualified in the future. This is because qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code for which there are only limited judicial and administrative interpretations and involves the determination of a variety of factual matters and circumstances not entirely within our control. In addition, future legislation, new regulations, administrative interpretations or court decisions may significantly change the tax laws or the application of the tax laws with respect to qualification as a REIT for federal income tax purposes or the federal income tax consequences of this qualification.
Even if we qualify as a REIT, we will be subject to certain federal, state and local taxes on our income and property and on taxable income that we do not distribute to our shareholders. In addition, we may engage in activities that are not customarily provided by a landlord through taxable subsidiaries and will be subject to federal income tax at regular corporate rates on the income of those subsidiaries.
The ability of our stockholders to control our policies and effect a change of control of our company is limited by certain provisions of our charter and bylaws and by Maryland law.
There are provisions in our charter and bylaws that may discourage a third party from making a proposal to acquire us, even if some of our stockholders might consider the proposal to be in their best interests. These provisions include the following:
Our charter authorizes our Board of Directors to issue up to 50,000,000 shares of preferred stock without stockholder approval and to establish the preferences and rights, including voting rights, of any series of preferred stock issued. The Board of Directors may issue preferred stock without stockholder approval, which could allow the Board to issue one or more classes or series of preferred stock that could discourage or delay a tender offer or a change in control.
To maintain our qualification as a REIT for federal income tax purposes, not more than 50% in value of our outstanding stock may be owned, directly or indirectly, by or for five or fewer individuals at any time during the last half of any taxable year. To maintain this qualification, and/or to address other concerns about concentrations of ownership of our stock, our charter generally prohibits ownership (directly, indirectly by virtue of the attribution provisions of the Code, or beneficially as defined in Section 13 of the Securities Exchange Act) by any single stockholder of more than 9.8% of the issued and outstanding shares of any class or series of our stock. In general, under our charter, pension plans and mutual funds may directly and beneficially own up to 15% of the outstanding shares of any class or series of stock. Under our charter, our Board of Directors may in its sole discretion waive or modify the ownership limit for one or more persons, but is not required to do so even if such waiver would not affect our qualification as a REIT. These ownership limits may prevent or delay a change in control and, as a result, could adversely affect our stockholders’ ability to realize a premium for their shares of common stock.
Our bylaws provide that the affirmative vote of holders of a majority of all of the shares entitled to be cast in the election of directors is required to elect a director. In a contested election, if no nominee receives the vote of holders of a majority of all of the shares entitled to be cast, the incumbent directors would remain in office. This requirement may prevent or delay a change in control and, as a result, could adversely affect our stockholders’ ability to realize a premium for their shares of common stock.
As a Maryland corporation, we are subject to the provisions of the Maryland General Corporation Law. Maryland law imposes restrictions on some business combinations and requires compliance with statutory procedures before some mergers and acquisitions may occur, which may delay or prevent offers to acquire us or increase the difficulty of completing any offers, even if they are in our stockholders’ best interests. In addition, other provisions of the Maryland General Corporation Law permit the Board of Directors to make elections and to take actions without stockholder approval (such as classifying our Board such that the entire Board is not up for reelection annually) that, if made or taken, could have the effect of discouraging or delaying a change in control.

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ITEM 1b. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.   COMMUNITIES
Our real estate investments consist primarily of current operating apartment communities, communities in various stages of development (“Development Communities”) and Development Rights (as defined below). Our current operating communities are further distinguished as Established Communities, Other Stabilized Communities, Lease-Up Communities and Redevelopment Communities. The following is a description of each category:
Current Communities are categorized as Established, Other Stabilized, Lease-Up, or Redevelopment according to the following attributes:
  •   Established Communities (also known as Same Store Communities) are consolidated communities where a comparison of operating results from the prior year to the current year is meaningful, as these communities were owned and had stabilized occupancy and operating expenses as of the beginning of the prior year. For the year ended December 31, 2009, the Established Communities are communities that are consolidated for financial reporting purposes, had stabilized occupancy and operating expenses as of January 1, 2008, are not conducting or planning to conduct substantial redevelopment activities and are not held for sale or planned for disposition within the current year. A community is considered to have stabilized occupancy at the earlier of (i) attainment of 95% physical occupancy or (ii) the one-year anniversary of completion of development or redevelopment.
 
  •   Other Stabilized Communities includes all other completed communities that we own or have a direct or indirect ownership interest in, and that have stabilized occupancy, as defined above. Other Stabilized Communities do not include communities that are conducting or planning to conduct substantial redevelopment activities within the current year.
 
  •   Lease-Up Communities are communities where construction has been complete for less than one year and where physical occupancy has not reached 95%.
 
  •   Redevelopment Communities are communities where substantial redevelopment is in progress or is planned to begin during the current year. For communities that we wholly own, redevelopment is considered substantial when capital invested during the reconstruction effort is expected to exceed the lesser of $5,000,000 or 10% of the community’s acquisition cost. The definition of substantial redevelopment may differ for communities owned through a joint venture arrangement, or by one of the Funds.
Development Communities are communities that are under construction and for which a certificate of occupancy has not been received for the entire community. These communities may be partially complete and operating.
Development Rights are development opportunities in the early phase of the development process for which we either have an option to acquire land or enter into a leasehold interest, for which we are the buyer under a long-term conditional contract to purchase land or where we own land to develop a new community. We capitalize related pre-development costs incurred in pursuit of new developments for which we currently believe future development is probable.

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In addition, we own approximately 60,000 square feet of office space in Alexandria, Virginia, for our corporate office, with all other regional and administrative offices leased under operating leases. In the third quarter of 2009 we entered into a ten-year operating lease for approximately 50,744 square feet of office space in Arlington, Virginia, which will serve as the location for our corporate office by the end of the second quarter 2010. We are exploring alternatives to lease or sell the office space in Alexandria, Virginia.
As of December 31, 2009, communities that we owned or held a direct or indirect interest in were classified as follows:
                 
    Number of     Number of  
    communities     apartment homes  
Current Communities
               
 
               
Established Communities:
               
New England
    22       5,359  
Metro NY/NJ
    18       5,895  
Mid-Atlantic/Midwest
    15       6,088  
Pacific Northwest
    8       1,943  
Northern California
    15       4,432  
Southern California
    12       3,679  
 
           
Total Established
    90       27,396  
 
           
 
               
Other Stabilized Communities:
               
New England
    12       3,334  
Metro NY/NJ
    11       3,241  
Mid-Atlantic/Midwest
    13       3,616  
Pacific Northwest
    4       1,021  
Northern California
    11       2,989  
Southern California
    10       1,718  
 
           
Total Other Stabilized
    61       15,919  
 
           
 
               
Lease-Up Communities
    7       1,996  
 
               
Redevelopment Communities
    7       2,615  
 
           
 
               
Total Current Communities
    165       47,926  
 
           
 
               
Development Communities
    7       2,438  
 
           
 
               
Development Rights
    28       7,180  
 
           
Our holdings under each of the above categories are discussed on the following pages.
Current Communities
Our Current Communities are primarily garden-style apartment communities consisting of two and three-story buildings in landscaped settings. As of January 31, 2010, these include 113 garden-style (of which 15 are mixed communities and/or include town homes), 22 high-rise and 29 mid-rise apartment communities.
Our communities offer a variety of quality amenities and features, including:
  •   gourmet kitchens;
  •   lofts and vaulted ceilings;
  •   walk-in closets;
  •   fireplaces;
  •   patios/decks; and
  •   modern appliances.
Other features at various communities may include:

18


 

  •   swimming pools;
  •   fitness centers;
  •   tennis courts; and
 
  •   wi-fi lounges.
We also have an extensive and ongoing maintenance program to continually maintain and enhance our communities and apartment homes. The aesthetic appeal of our communities and a service-oriented property management team, focused on the specific needs of residents, enhances market appeal to discriminating residents. We believe our mission of Enhancing the Lives of our Residents helps us achieve higher rental rates and occupancy levels while minimizing resident turnover and operating expenses.
Our Current Communities are located in the following geographic markets:
                                                 
    Number of     Number of apartment     Percentage of total  
    communities at     homes at     apartment homes at  
    1-31-09     1-31-10     1-31-09     1-31-10     1-31-09     1-31-10  
New England
    36       36       9,077       9,132       19.9 %     19.2 %
Boston, MA
    24       25       6,460       6,683       14.2 %     14.0 %
Fairfield County, CT
    12       11       2,617       2,449       5.7 %     5.2 %
 
                                               
Metro NY/NJ
    31       32       9,353       10,255       20.4 %     21.5 %
Long Island, NY
    7       6       1,732       1,732       3.8 %     3.6 %
Northern New Jersey
    5       5       1,618       1,618       3.5 %     3.4 %
Central New Jersey
    7       6       2,258       2,258       4.9 %     4.7 %
New York, NY
    12       15       3,745       4,647       8.2 %     9.8 %
 
                                               
Mid-Atlantic/Midwest
    30       27       9,213       9,409       20.2 %     19.8 %
Washington, DC
    24       22       7,661       8,152       16.8 %     17.1 %
Chicago, IL
    6       5       1,552       1,257       3.4 %     2.7 %
 
                                               
Pacific Northwest
    11       12       2,746       2,964       6.0 %     6.2 %
Seattle, WA
    11       12       2,746       2,964       6.0 %     6.2 %
 
                                               
Northern California
    32       32       8,879       9,160       19.4 %     19.2 %
Oakland-East Bay, CA
    8       9       2,394       2,833       5.2 %     5.9 %
San Francisco, CA
    11       12       2,489       2,749       5.4 %     5.8 %
San Jose, CA
    13       11       3,996       3,578       8.8 %     7.5 %
 
                                               
Southern California
    24       25       6,460       6,711       14.1 %     14.1 %
Los Angeles, CA
    12       12       3,345       3,345       7.3 %     7.0 %
Orange County, CA
    8       9       1,896       2,147       4.1 %     4.5 %
San Diego, CA
    4       4       1,219       1,219       2.7 %     2.6 %
 
                                   
 
    164       164       45,728       47,631       100.0 %     100.0 %
 
                                   
We manage and operate substantially all of our Current Communities. During the year ended December 31, 2009, we completed construction of 2,526 apartment homes in nine communities and sold 1,037 apartment homes in five communities. The average age of our Current Communities, on a weighted average basis according to number of apartment homes, is 14.3 years. When adjusted to reflect redevelopment activity, as if redevelopment were a new construction completion date, the average age of our Current Communities is 9.2 years.
Of the Current Communities, as of January 31, 2010, we own:
  •   a full fee simple, or absolute, ownership interest in 124 operating communities, ten of which are on land subject to land leases expiring in October 2026, November 2028, July 2029, December 2034, July 2062, December 2073, April 2095, September 2105 and March 2142;
  •   a general partnership interest in three partnerships that each own a fee simple interest in an operating community;
  •   a general partnership interest and an indirect limited partnership interest in both Fund I and Fund II. Subsidiaries of Fund I own a fee simple interest in 19 operating communities, and subsidiaries of Fund II own a fee simple interest in two operating communities;
  •   a general partnership interest in two partnerships structured as “DownREITs,” as described more fully below, that own an aggregate of nine communities;

19


 

  •   a membership interest in six limited liability companies that each hold a fee simple interest in an operating community, two of which are on land subject to land leases expiring in September 2044, and November 2089; and
 
  •   a residual profits interest (with no ownership interest) in a limited liability company to which an operating community was transferred upon completion of construction in the second quarter of 2006.
For some communities, a land lease is used to support tax advantaged structures that ultimately allow us to purchase the land upon lease expiration. We have options to purchase the underlying land for the leases that expire in October 2026, November 2028, July 2029, December 2034, April 2095 and March 2142. We also hold, directly or through wholly owned subsidiaries, the full fee simple ownership interest in the seven Development Communities, all of which are currently consolidated for financial reporting purposes and two of which are subject to land leases expiring in May 2105 and April 2106.
In our two partnerships structured as DownREITs, either AvalonBay or one of our wholly owned subsidiaries is the general partner, and there are one or more limited partners whose interest in the partnership is represented by units of limited partnership interest. For each DownREIT partnership, limited partners are entitled to receive an initial distribution before any distribution is made to the general partner. Although the partnership agreements for each of the DownREITs are different, generally the distributions per unit paid to the holders of units of limited partnership interests have approximated our current common stock dividend amount. The holders of units of limited partnership interest have the right to present all or some of their units for redemption for a cash amount as determined by the applicable partnership agreement and based on the fair value of our common stock. In lieu of a cash redemption by the partnership, we may elect to acquire any unit presented for redemption for one share of our common stock or for such cash amount. As of January 31, 2010, there were 15,351 DownREIT partnership units outstanding. The DownREIT partnerships are consolidated for financial reporting purposes.

20


 

     
Profile of Current, Development and Unconsolidated Communities (1)
(Dollars in thousands, except per apartment home data)
                                                                                     
                                                                Average        
                Approx.             Year of   Average     Physical   Average     rental rate     Financial  
        Number of     rentable             completion /   size     occupancy   economic occupancy     $ per     $ per     reporting  
    City and state   homes     area (Sq. Ft.)     Acres     acquisition   (Sq. Ft.)     at 12/31/09   2009     2008     Apt (4)     Sq. Ft.     cost (5)  
CURRENT COMMUNITIES
                                                                                   
 
                                                                                   
NEW ENGLAND
                                                                                   
Boston, MA
                                                                                   
Avalon at Lexington
  Lexington, MA     198       237,855       16.1     1994     1,201     91.9%     95.0 %     97.6 %     1,818       1.44       16,460  
Avalon Oaks
  Wilmington, MA     204       237,167       22.5     1999     1,163     96.1%     97.1 %     95.6 %     1,467       1.23       21,290  
Avalon Summit
  Quincy, MA     245       224,974       8.0     1986/1996     918     91.4%     96.0 %     97.1 %     1,361       1.42       17,694  
Avalon Essex
  Peabody, MA     154       201,063       11.1     2000     1,306     95.5%     96.3 %     96.3 %     1,572       1.16       22,023  
Avalon at Prudential Center
  Boston, MA     780       759,130       1.0     1968/1998     973     95.1%     93.8 %     97.5 %     3,005       2.90       157,333  
Avalon Oaks West
  Wilmington, MA     120       133,376       27.0     2002     1,111     96.7%     96.3 %     93.9 %     1,355       1.17       16,984  
Avalon Orchards
  Marlborough, MA     156       179,227       23.0     2002     1,149     97.4%     96.4 %     97.0 %     1,528       1.28       21,417  
Avalon at Newton Highlands (8)
  Newton, MA     294       339,537       7.0     2003     1,155     94.9%     96.1 %     96.2 %     2,149       1.79       57,258  
Avalon at The Pinehills I
  Plymouth, MA     101       151,629       6.0     2004     1,501     95.1%     95.0 %     95.9 %     1,909       1.21       20,008  
Avalon at Crane Brook
  Peabody, MA     387       433,778       20.0     2004     1,121     95.4%     95.6 %     96.4 %     1,383       1.18       54,961  
Essex Place
  Peabody, MA     286       250,473       18.0     2004     876     94.4%     93.9 %(2)     88.8 %(2)     1,235       1.32 (2)     35,411  
Avalon at Bedford Center
  Bedford, MA     139       159,704       38.0     2005     1,149     92.8%     95.5 %     95.3 %     1,738       1.45       24,804  
Avalon Chestnut Hill
  Chestnut Hill, MA     204       271,899       4.7     2007     1,333     95.1%     96.0 %     93.1 %     2,316       1.67       60,483  
Avalon Shrewsbury
  Shrewsbury, MA     251       274,780       25.5     2007     1,095     92.0%     94.7 %     95.0 %     1,361       1.18       35,760  
Avalon Danvers
  Danvers, MA     433       512,991       75.0     2006     1,185     96.1%     95.1 %     86.4 %     1,492       1.20       82,956  
Avalon Woburn
  Woburn, MA     446       486,091       56.0     2007     1,090     95.5%     96.4 %     96.7 %     1,590       1.41       83,327  
Avalon at Lexington Hills
  Lexington, MA     387       511,454       23.0     2007     1,322     95.6%     94.8 %     71.1 %(3)     1,877       1.35       86,984  
Avalon Acton
  Acton, MA     380       373,690       50.3     2007     983     94.5%     95.0 %     59.2 %(3)     1,312       1.27       62,883  
Avalon Sharon
  Sharon, MA     156       178,628       27.2     2007     1,145     98.1%     96.5 %     62.3 %(3)     1,618       1.36       30,221  
Avalon at Center Place (11)
  Providence, RI     225       233,910       1.2     1991/1997     1,040     93.3%     95.0 %     94.5 %     1,952       1.78       29,537  
Avalon at Hingham Shipyard
  Hingham, MA     235       298,981       12.9     2009     1,272     97.5%     80.1 %(3)     17.1 %     1,735       1.09 (3)     54,221  
Avalon Northborough I
  Northborough, MA     163       183,000       14.0     2009     1,123     97.6%     53.0 %(3)     N/A       3,626       1.71 (3)     25,030  
Avalon Blue Hills
  Randolph, MA     276       307,085       23.1     2009     1,113     82.3%     42.7 %(3)     N/A       7,314       2.80 (3)     45,316  
 
                                                                                   
Fairfield-New Haven, CT
                                                                                   
Avalon Gates
  Trumbull, CT     340       389,047       37.0     1997     1,144     95.6%     96.9 %     96.5 %     1,618       1.37       37,712  
Avalon Glen
  Stamford, CT     238       265,940       4.1     1991     1,117     95.8%     95.2 %     97.1 %     1,892       1.61       32,566  
Avalon Springs
  Wilton, CT     102       160,159       12.0     1996     1,570     95.1%     95.2 %     94.2 %     2,825       1.71       17,299  
Avalon Valley
  Danbury, CT     268       303,193       17.1     1999     1,131     98.9%     96.4 %     95.7 %     1,616       1.38       26,443  
Avalon on Stamford Harbor
  Stamford, CT     323       337,572       12.1     2003     1,045     93.8%     94.8 %     96.5 %     2,421       2.19       62,969  
Avalon New Canaan (9)
  New Canaan, CT     104       145,118       9.1     2002     1,395     97.1%     94.2 %     96.1 %     2,648       1.79       24,469  
Avalon at Greyrock Place
  Stamford, CT     306       334,381       3.0     2002     1,093     95.8%     95.3 %     96.3 %     2,097       1.83       70,844  
Avalon Danbury
  Danbury, CT     234       238,952       36.0     2005     1,021     97.4%     95.6 %     96.0 %     1,584       1.48       35,621  
Avalon Darien
  Darien, CT     189       242,533       32.0     2004     1,283     94.7%     93.7 %     94.7 %     2,433       1.78       41,598  
Avalon Milford I
  Milford, CT     246       230,246       22.0     2004     936     97.2%     97.9 %     96.2 %     1,441       1.51       31,501  
Avalon Huntington
  Shelton, CT     99       145,573       7.1     2008     1,470     91.9%     86.8 %     17.0 %(3)     2,029       1.20       25,214  

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Profile of Current, Development and Unconsolidated Communities (1)
(Dollars in thousands, except per apartment home data)
                                                                                     
                                                                Average        
                Approx.             Year of   Average     Physical   Average     rental rate     Financial  
        Number of     rentable             completion /   size     occupancy   economic occupancy     $ per     $ per     reporting  
    City and state   homes     area (Sq. Ft.)     Acres     acquisition   (Sq. Ft.)     at 12/31/09   2009     2008     Apt (4)     Sq. Ft.     cost (5)  
METRO NY/NJ
                                                                                   
 
Long Island, NY
                                                                                   
Avalon Commons
  Smithtown, NY     312       385,290       20.6     1997     1,235     96.2%     94.5 %     95.0 %     2,060       1.58       34,105  
Avalon Towers
  Long Beach, NY     109       135,036       1.3     1990/1995     1,239     94.5%     96.0 %     97.4 %     3,551       2.75       21,594  
Avalon Court
  Melville, NY     494       601,342       35.4     1997/2000     1,217     97.4%     95.2 %     94.2 %     2,375       1.86       60,411  
Avalon at Glen Cove South (11)
  Glen Cove, NY     256       262,285       4.0     2004     1,025     93.8%     95.1 %     95.8 %     2,265       2.10       68,152  
Avalon Pines I & II
  Coram, NY     450       547,981       74.0     2005/2006     1,218     96.2%     94.7 %     95.8 %     1,958       1.52       71,712  
Avalon at Glen Cove North (11)
  Glen Cove, NY     111       100,851       1.3     2007     909     97.3%     95.3 %     96.8 %     2,076       2.18       39,944  
 
                                                                                   
Northern New Jersey
                                                                                   
Avalon Cove
  Jersey City, NJ     504       640,467       11.0     1997     1,271     96.4%     96.1 %     96.1 %     2,719       2.06       93,581  
Avalon at Edgewater
  Edgewater, NJ     408       438,670       7.6     2002     1,075     97.1%     95.8 %     96.3 %     2,290       2.04       75,438  
Avalon at Florham Park
  Florham Park, NJ     270       330,410       41.9     2001     1,224     95.6%     96.3 %     95.8 %     2,576       2.03       42,115  
Avalon Lyndhurst
  Lyndhurst, NJ     328       352,462       5.8     2006     1,075     93.9%     96.1 %     94.9 %     2,023       1.81       80,984  
 
                                                                                   
Central New Jersey
                                                                                   
Avalon Run (7) & Run East (8)
  Lawrenceville, NJ     632       718,101       36.1     1994/1996     1,136     95.7%     95.7 %     95.1 %     1,484       1.25       76,725  
Avalon Watch
  West Windsor, NJ     512       496,141       64.4     1988     969     93.8%     96.0 %(2)     96.0 %     1,393       1.38 (2)     36,111  
Avalon at Freehold
  Freehold, NJ     296       317,416       40.3     2002     1,072     94.6%     96.2 %     96.2 %     1,708       1.53       34,826  
Avalon Run East II
  Lawrenceville, NJ     312       341,292       70.5     2003     1,094     97.1%     95.5 %     96.0 %     1,753       1.53       52,238  
Avalon at Tinton Falls
  Tinton Falls, NJ     216       240,747       35.0     2007     1,115     96.3%     95.9 %     56.3 %(3)     1,756       1.51       41,045  
 
                                                                                   
New York, NY
                                                                                   
Avalon Gardens
  Nanuet, NY     504       617,992       62.5     1998     1,226     96.2%     96.9 %     97.0 %     2,082       1.64       55,579  
Avalon Green
  Elmsford, NY     105       115,038       16.9     1995     1,096     96.2%     97.3 %     97.4 %     2,327       2.07       13,951  
Avalon Willow
  Mamaroneck, NY     227       240,459       4.0     2000     1,059     96.0%     97.1 %     98.0 %     2,188       2.01       47,603  
The Avalon
  Bronxville, NY     110       148,335       1.5     1999     1,349     97.3%     96.1 %     97.7 %     3,660       2.61       31,579  
Avalon Riverview I (11)
  Long Island City, NY     372       352,988       1.0     2002     949     94.9%     96.8 %     96.8 %     3,139       3.20       95,234  
Avalon Bowery Place I
  New York, NY     206       162,000       1.1     2006     786     97.0%     95.5 %     96.2 %     4,037       4.90       92,810  
Avalon Riverview North (11)
  Long Island City, NY     602       519,092       1.8     2007     862     93.9%     96.2 %     92.2 %(3)     2,746       3.06       169,329  
Avalon on the Sound (11)
  New Rochelle, NY     412       415,369       2.4     2001     1,008     96.4%     96.7 %     96.2 %     2,204       2.11       117,354  
Avalon on the Sound East (11)
  New Rochelle, NY     588       622,999       1.7     2007     1,060     94.9%     96.1 %     79.6 %(3)     2,270       2.06       179,654  
Avalon Bowery Place II
  New York, NY     90       73,624       1.1     2007     818     96.0%     94.1 %     97.1 %     3,554       4.09       55,766  
Avalon White Plains
  White Plains, NY     407       379,555       0.1     2009     933     86.0%     54.3 %(3)     14.2 %     2,477       1.44 (3)     150,431  
Avalon Morningside Park (11)
  New York, NY     295       243,157       0.8     2009     824     93.2%     89.5 %(3)     25.5 %     2,857       3.10 (3)     109,654  
Avalon Charles Pond
  Coram, NY     200       176,000       39.0     2009     880     96.5%     50.5 %(3)     N/A       4,382       2.51 (3)     48,078  
 
                                                                                   
MID-ATLANTIC/MIDWEST
                                                                                   
 
Baltimore, MD
                                                                                   
Avalon at Fairway Hills I, II, & III (7)
  Columbia, MD     720       724,027       59.0     1987/1996     1,006     95.4%     96.3 %     94.6 %     1,335       1.28       52,948  
Avalon Symphony Woods (SGlen)
  Columbia, MD     176       179,880       10.0     1986     1,022     94.9%     92.8 %(2)     88.8 %(2)     1,328       1.21 (2)     13,828  
Avalon Symphony Woods (SGate)
  Columbia, MD     216       214,670       12.7     1986/2006     994     98.2%     92.0 %(2)     90.3 %(2)     1,257       1.16 (2)     41,752  
 
                                                                                   
Washington, DC
                                                                                   
Avalon at Foxhall
  Washington, DC     308       297,876       2.7     1982     967     92.9%     95.3 %     96.3 %     2,307       2.27       45,086  
Avalon at Gallery Place I
  Washington, DC     203       184,157       0.5     2003     907     96.1%     96.8 %     96.7 %     2,577       2.75       49,045  
Avalon at Decoverly
  Rockville, MD     564       551,292       34.8     1991/1995/2007     977     94.9%     95.7 %     96.2 %     1,487       1.46       63,524  
Avalon Fields I
  Gaithersburg, MD     192       197,280       5.0     1996     1,028     95.8%     97.9 %     96.7 %     1,407       1.34       14,541  
Avalon Fields II
  Gaithersburg, MD     96       100,268       5.0     1998     1,044     96.9%     96.3 %     97.0 %     1,584       1.46       8,333  
Avalon Knoll
  Germantown, MD     300       290,544       26.7     1985     968     96.3%     96.0 %     96.5 %     1,236       1.23       9,003  
Avalon at Rock Spring (9) (11)
  North Bethesda, MD     386       387,884       10.2     2003     1,005     96.9%     97.5 %     96.8 %     1,779       1.73       82,586  

22


 

     
Profile of Current, Development and Unconsolidated Communities (1)
(Dollars in thousands, except per apartment home data)
                                                                                     
                                                                Average        
                Approx.             Year of   Average     Physical   Average     rental rate     Financial  
        Number of     rentable             completion /   size     occupancy   economic occupancy     $ per     $ per     reporting  
    City and state   homes     area (Sq. Ft.)     Acres     acquisition   (Sq. Ft.)     at 12/31/09   2009     2008     Apt (4)     Sq. Ft.     cost (5)  
Avalon at Grosvenor Station
  North Bethesda, MD     497       472,001       10.0     2004     950     94.8%     96.9 %     97.0 %     1,798       1.84       82,452  
Avalon at Traville (8)
  North Potomac, MD     520       575,529       47.9     2004     1,107     95.6%     96.5 %     97.0 %     1,777       1.55       70,102  
Avalon Fair Lakes
  Fairfax, VA     420       354,945       24.3     1989/1996     845     95.5%     95.7 %     93.3% (2)     1,382       1.57       37,886  
Avalon at Ballston — Washington Towers
  Arlington, VA     344       294,954       4.1     1990     857     95.1%     95.8 %     96.2 %     1,809       2.02       39,215  
Avalon at Cameron Court
  Alexandria, VA     460       478,068       16.0     1998     1,039     96.1%     96.4 %     96.2 %     1,878       1.74       44,582  
Avalon at Providence Park
  Fairfax, VA     141       148,282       9.3     1988/1997     1,052     97.9%     96.3 %     96.7 %     1,558       1.43       11,942  
Avalon Crescent
  McLean, VA     558       613,426       19.1     1996     1,099     97.0%     97.0 %     96.5 %     1,850       1.63       57,921  
Avalon at Arlington Square
  Arlington, VA     842       628,433       20.1     2001     746     95.1%     96.6 %     96.8 %     1,876       2.43       113,679  
 
                                                                                   
Chicago, IL
                                                                                   
Avalon at Danada Farms (8)
  Wheaton, IL     295       351,206       19.2     1997     1,191     95.3%     96.5 %     96.2 %     1,417       1.15       40,030  
Avalon at Stratford Green (8)
  Bloomingdale, IL     192       237,124       12.7     1997     1,235     95.3%     96.0 %     96.7 %     1,425       1.11       22,253  
Avalon Arlington Heights
  Arlington Heights, IL     409       352,236       2.8     1987/2000     861     93.6%     95.7 %     96.2 %     1,495       1.66       56,986  
 
                                                                                   
PACIFIC NORTHWEST
                                                                                   
Seattle, WA
                                                                                   
Avalon Redmond Place
  Redmond, WA     222       219,075       8.4     1991/1997     987     94.1%     92.0 %     86.4 %(2)     1,358       1.27       31,922  
Avalon at Bear Creek
  Redmond, WA     264       296,530       22.2     1998     1,123     91.7%     94.4 %     96.6 %     1,380       1.16       36,283  
Avalon Bellevue
  Bellevue, WA     200       170,965       1.7     2001     855     94.0%     93.3 %     94.8 %     1,555       1.70       31,093  
Avalon RockMeadow (8)
  Bothell, WA     206       246,683       11.2     2000     1,197     91.8%     94.4 %     95.2 %     1,260       0.99       25,032  
Avalon WildReed (8)
  Everett, WA     234       266,580       23.0     2000     1,139     95.7%     95.3 %     95.8 %     1,100       0.92       23,132  
Avalon HighGrove (8)
  Everett, WA     391       428,962       19.0     2000     1,097     94.6%     93.9 %     94.8 %     1,108       0.95       39,942  
Avalon ParcSquare (8)
  Redmond, WA     124       131,706       2.0     2000     1,062     94.4%     93.0 %     96.9 %     1,611       1.41       19,542  
Avalon Brandemoor (8)
  Lynwood, WA     424       465,257       27.0     2001     1,097     95.1%     95.1 %     95.1 %     1,162       1.01       45,691  
Avalon Belltown
  Seattle, WA     100       95,201       0.7     2001     952     95.0%     93.1 %     95.3 %     1,757       1.72       18,499  
Avalon Meydenbauer
  Bellevue, WA     368       333,502       3.6     2008     906     96.2%     92.2 %     48.1 %(3)     1,616       1.65       89,365  
 
                                                                                   
NORTHERN CALIFORNIA
                                                                                   
Oakland-East Bay, CA
                                                                                   
Avalon Fremont
  Fremont, CA     308       386,277       14.3     1994     1,254     96.8%     97.1 %     96.3 %     1,677       1.30       57,311  
Avalon Dublin
  Dublin, CA     204       179,004       13.0     1989/1997     877     95.1%     96.7 %     96.7 %     1,473       1.62       28,694  
Avalon Pleasanton
  Pleasanton, CA     456       366,062       14.7     1988/1994     803     94.5%     95.3 %(2)     96.8 %     1,371       1.63 (2)     66,026  
Avalon at Union Square
  Union City, CA     208       150,320       8.5     1973/1996     723     92.8%     95.9 %     96.7 %     1,243       1.65       22,924  
Waterford
  Hayward, CA     544       452,043       11.1     1985/1986     831     90.8%     91.8 %     93.9 %     1,250       1.38       62,190  
Avalon at Willow Creek
  Fremont, CA     235       191,935       13.5     1985/1994     817     96.2%     96.8 %(2)     97.0 %     1,457       1.73 (2)     36,493  
Avalon at Dublin Station
  Dublin, CA     305       300,760       4.7     2006     986     92.8%     94.1 %     67.6 %(3)     1,691       1.61       84,380  
Avalon Union City
  Union City, CA     439       428,730       6.0     2009     977     85.7%     42.5 %(3)     N/A       2,120       0.92 (3)     118,740  
 
                                                                                   
San Francisco, CA
                                                                                   
Avalon at Cedar Ridge
  Daly City, CA     195       141,411       7.0     1972/1997     725     90.3%     95.5 %(2)     97.0 %     1,621       2.13 (2)     29,141  
Avalon at Nob Hill
  San Francisco, CA     185       108,712       1.4     1990/1995     588     97.8%     96.0 %     96.8 %     1,921       3.14       28,192  
Crowne Ridge
  San Rafael, CA     254       222,685       21.9     1973/1996     877     96.9%     95.6 %     96.8 %     1,479       1.61       33,100  
Avalon Foster City
  Foster City, CA     288       222,364       11.0     1973/1994     772     94.1%     95.0 %     97.1 %     1,585       1.95       44,191  
Avalon Towers by the Bay
  San Francisco, CA     227       285,881       1.0     1999     1,259     94.3%     96.1 %     97.5 %     3,025       2.31       67,055  
Avalon Pacifica
  Pacifica, CA     220       186,800       21.9     1971/1995     849     94.1%     95.1 %     97.0 %     1,650       1.85       32,481  
Avalon Sunset Towers
  San Francisco, CA     243       171,854       16.0     1961/1996     707     94.2%     94.2 %     96.3 %     1,975       2.63       28,890  
Avalon at Diamond Heights
  San Francisco, CA     154       123,566       3.0     1972/1994     802     90.3%     93.2 % (2)     95.9 % (2)     1,901       2.21 (2)     28,933  
Avalon at Mission Bay North
  San Francisco, CA     250       240,368       1.4     2003     961     93.6%     96.3 %     96.0 %     3,122       3.13       93,148  
Avalon at Mission Bay III
  San Francisco, CA     260       261,361       1.5     2009     1,005     85.0%     46.3 %(3)     N/A       3,078       1.42 (3)     146,913  

23


 

     
Profile of Current, Development and Unconsolidated Communities (1)
(Dollars in thousands, except per apartment home data)
                                                                                     
                                                                Average        
                Approx.             Year of   Average     Physical   Average     rental rate     Financial  
        Number of     rentable             completion /   size     occupancy   economic occupancy     $ per             reporting  
    City and state   homes     area (Sq. Ft.)     Acres     acquisition   (Sq. Ft.)     at 12/31/09   2009     2008     Apt (4)     $ per Sq. Ft.     cost (5)  
San Jose, CA
                                                                                   
Avalon Campbell
  Campbell, CA     348       329,816       10.8     1995     948     94.5%     94.5 %     96.9 %     1,686       1.68       60,672  
CountryBrook
  San Jose, CA     360       322,992       14.0     1985/1996     897     96.9%     94.9 %     95.9 %     1,489       1.58       52,874  
Avalon on the Alameda
  San Jose, CA     305       320,464       8.9     1999     1,051     94.1%     96.7 %     97.3 %     2,037       1.87       56,939  
Avalon Rosewalk
  San Jose, CA     456       459,162       16.6     1997/1999     1,007     94.5%     95.8 %     96.4 %     1,699       1.62       79,972  
Avalon Silicon Valley
  Sunnyvale, CA     710       659,729       13.6     1997     929     95.4%     96.8 %     96.1 %     1,955       2.04       123,527  
Avalon Mountain View (9)
  Mountain View, CA     248       211,552       10.5     1986     853     94.8%     90.6 %(2)     88.0 %(2)     1,859       1.97  (2)     58,883  
Avalon at Creekside
  Mountain View, CA     294       215,680       13.0     1962/1997     734     96.3%     97.0 %     97.6 %     1,515       2.00       43,657  
Avalon at Cahill Park
  San Jose, CA     218       221,933       3.8     2002     1,018     95.4%     96.7 %     97.6 %     2,020       1.92       52,747  
Avalon Towers on the Peninsula
  Mountain View, CA     211       218,392       1.9     2002     1,035     95.7%     97.0 %     97.3 %     2,639       2.47       65,811  
Countrybrook II
  San Jose, CA     80       64,554       3.6     2007     807     100.0%     95.2 %     96.8 %     1,442       1.70       18,005  
 
                                                                                   
SOUTHERN CALIFORNIA
                                                                                   
 
Orange County, CA
                                                                                   
Avalon Newport
  Costa Mesa, CA     145       122,415       6.6     1956/1996     844     95.9%     95.3 %     96.3 %     1,644       1.86       10,441  
Avalon Mission Viejo
  Mission Viejo, CA     166       124,770       7.8     1984/1996     752     95.2%     93.5 %     95.4 %     1,270       1.58       14,120  
Avalon at South Coast
  Costa Mesa, CA     258       210,922       8.0     1973/1996     818     96.9%     94.0 %     94.4 %     1,377       1.58       26,027  
Avalon Santa Margarita
  Rancho Santa Margarita, CA     301       229,593       20.0     1990/1997     763     95.4%     93.1 %     96.7 %     1,333       1.63       24,527  
Avalon at Pacific Bay
  Huntington Beach, CA     304       268,720       9.7     1971/1997     884     94.4%     94.2 %     96.1 %     1,512       1.61       33,233  
Avalon Warner Place
  Canoga Park, CA     210       186,402       3.3     2007     888     93.3%     94.1 %     57.2 %(3)     1,583       1.68       52,742  
Avalon Anaheim Stadium
  Anaheim, CA     251       302,480       3.5     2009     1,205     95.6%     49.2 %(3)     4.8 %     2,267       0.93  (3)     97,813  
 
                                                                                   
San Diego, CA
                                                                                   
Avalon at Mission Bay
  San Diego, CA     564       402,320       12.9     1969/1997     713     95.2%     94.6 %     95.0 %     1,433       1.90       66,886  
Avalon at Mission Ridge
  San Diego, CA     200       208,125       4.0     1960/1997     1,041     95.0%     92.3 %     94.9 %     1,652       1.46       22,666  
Avalon at Cortez Hill
  San Diego, CA     294       227,373       1.4     1973/1998     773     94.9%     93.4 %     96.4 %     1,506       1.82       34,745  
Avalon Fashion Valley
  San Diego, CA     161       186,766       10.0     2008     1,160     92.6%     68.4 %     15.3 %(3)     2,380       1.24       64,540  
 
                                                                                   
Los Angeles, CA
                                                                                   
Avalon at Media Center
  Burbank, CA     748       532,264       14.1     1961/1997     712     95.2%     94.5 %     95.6 %     1,440       1.91       77,725  
Avalon Woodland Hills
  Woodland Hills, CA     663       597,871       18.2     1989/1997     902     89.6%     83.9 %(2)     76.9 %(2)     1,500       1.40  (2)     107,901  
Avalon at Warner Center
  Woodland Hills, CA     227       195,224       7.0     1979/1998     860     96.5%     94.2 %     94.7 %     1,554       1.70       27,564  
Avalon Glendale (11)
  Burbank, CA     223       241,714       5.1     2003     1,084     96.4%     94.5 %     94.2 %     2,271       1.98       41,567  
Avalon Burbank
  Burbank, CA     400       360,587       6.9     1988/2002     901     88.0%     88.1 %(2)     96.7 %(2)     1,878       1.84  (2)     91,653  
Avalon Camarillo
  Camarillo, CA     249       233,267       10.0     2006     937     95.2%     93.6 %     94.5 %     1,513       1.51       48,738  
Avalon Wilshire
  Los Angeles, CA     123       125,193       1.6     2007     1,018     94.3%     94.1 %     94.7 %     2,582       2.39       46,876  
Avalon Encino
  Los Angeles, CA     131       131,220       2.0     2008     1,002     96.2%     76.9 %     15.7 %(3)     2,475       1.79       61,815  

24


 

     
Profile of Current, Development and Unconsolidated Communities (1)
(Dollars in thousands, except per apartment home data)
                                                                                     
                                                                Average        
                Approx.             Year of   Average     Physical   Average     rental rate     Financial  
        Number of     rentable             completion /   size     occupancy   economic occupancy     $ per             reporting  
    City and state   homes     area (Sq. Ft.)     Acres     acquisition   (Sq. Ft.)     at 12/31/09   2009     2008     Apt (4)     $ per Sq. Ft.     cost (5)  
DEVELOPMENT COMMUNITIES
                                                                                   
 
                                                                                   
Avalon Irvine
  Irvine, CA     279       243,157       4.5     N/A     872     N/A     N/A       N/A       N/A       N/A       76,104  
Avalon Walnut Creek (9) (11)
  Walnut Creek, CA     422       448,384       5.3     N/A     1,063     N/A     N/A       N/A       N/A       N/A       98,820  
Avalon Norwalk
  Norwalk, CT     311       312,018       4.5     N/A     1,003     N/A     N/A       N/A       N/A       N/A       50,771  
Avalon Fort Greene
  Brooklyn, NY     631       498,632       1.0     N/A     790     N/A     N/A       N/A       N/A       N/A       259,672  
Avalon Towers Bellevue (11)
  Bellevue, WA     396       330,194       1.5     N/A     834     N/A     N/A       N/A       N/A       N/A       73,799  
Avalon Northborough II
  Northborough, MA     219       271,150       17.7     N/A     1,238     N/A     N/A       N/A       N/A       N/A       18,901  
Avalon at West Long Branch
  West Long Branch, NJ     180       192,357       10.4     N/A     1,069     N/A     N/A       N/A       N/A       N/A       2,219  
 
                                                                                   
UNCONSOLIDATED COMMUNITIES
                                                                                   
 
                                                                                   
Avalon at Mission Bay North II (9)
  San Francisco, CA     313       291,556       1.5     2006     931     92.3%     95.2 %     95.0 %     2,986       3.05       N/A  
Avalon Del Rey (9)
  Los Angeles, CA     309       284,387       5.0     2006     920     94.2%     94.3 %     92.7 %     1,972       2.02       N/A  
Avalon Chrystie Place I (9)(11)
  New York, NY     361       266,940       1.5     2005     739     99.0%     95.5 %     96.9 %     4,138       5.34       N/A  
Avalon Juanita Village (10)
  Kirkland, WA     211       209,335       2.9     2005     992     91.5%     91.6 %     95.3 %     1,661       1.53       N/A  
Avalon at Redondo Beach (6)
  Redondo Beach, CA     105       86,075       1.2     1971/2004     820     97.1%     93.3 %     94.3 %     1,906       2.17       N/A  
Avalon Sunset (6)
  Los Angeles, CA     82       71,037       0.8     1987/2005     866     97.6%     93.4 %     96.5 %     1,863       2.01       N/A  
Civic Center (6)
  Norwalk, CA     192       174,378       8.7     1987/2005     908     96.9%     92.5 %     93.6 %     1,584       1.61       N/A  
Avalon Paseo Place (6)
  Fremont, CA     134       106,249       7.0     1987/2005     793     96.3%     96.9 %     94.8 % (2)     1,453       1.77       N/A  
Avalon Yerba Buena (6)
  San Francisco, CA     160       159,604       0.9     2000/2006     998     93.1%     95.7 %     97.1 %     2,784       2.67       N/A  
The Springs (6)
  Corona, CA     320       241,440       13.3     1987/2006     755     95.3%     86.0 %     87.7 %     1,017       1.16       N/A  
Avalon Skyway (6)
  San Jose,CA     348       287,918       18.4     1994/2007     827     98.6%     96.7 %     97.7 %     1,460       1.71       N/A  
South Hills Apartments (6)
  West Covina, CA     85       107,150       5.3     1966/2007     1,261     94.1%     94.6 %     88.0 % (2)     1,636       1.23       N/A  
Avalon Lakeside (6)
  Wheaton, IL     204       162,821       12.4     2004     798     93.1%     96.0 %     96.2 %     985       1.18       N/A  
Avalon at Poplar Creek (6)
  Schaumburg, IL     196       178,490       12.8     1986/2005     911     95.9%     95.8 %     91.3 %     1,159       1.22       N/A  
Avalon Lombard (6)
  Schaumburg, IL     256       201,924       13.2     1988/2006     789     95.7%     97.2 %     96.2 % (2)     1,069       1.32       N/A  
Middlesex Crossing (6)
  Billerica, MA     252       188,915       13.0     2007     750     95.6%     96.8 %     96.0 %     1,250       1.61       N/A  
Weymouth Place (6)
  Weymouth, MA     211       154,957       7.7     1971/2007     734     99.1%     92.6 %     95.8 % (2)     1,124       1.42       N/A  
Avalon Columbia (6)
  Columbia, MD     170       180,452       11.3     1989/2004     1,061     96.5%     96.8 %     96.3 %     1,479       1.35       N/A  
Avalon Cedar Place (6)
  Columbia, MD     156       152,923       11.4     1972/2006     980     94.2%     97.0 %     86.8 % (2)     1,211       1.20       N/A  
Avalon Centerpoint (6)
  Baltimore,MD     392       312,356       6.9     2005/2007     797     91.9%     93.8 %     90.5 %     1,439       1.70       N/A  
Avalon at Aberdeen Station (6)
  Aberdeen, NJ     290       414,585       16.8     2002/2006     1,430     94.5%     96.4 %     96.5 %     1,759       1.19       N/A  
Avalon at Rutherford Station (6)
  East Rutherford, NJ     108       131,937       1.5     2005/2007     1,222     100.0%     96.6 %     95.2 %     2,222       1.76       N/A  
Avalon Crystal Hill (6)
  Pomona, NY     168       215,203       12.1     2001/2007     1,281     96.5%     96.6 %     95.2 %     1,982       1.49       N/A  
The Hermitage (12)
  Fairfax, VA     491       165,948       13.5     2009     338     95.3%     94.2 % (3)     N/A       1,355       3.78 (3)     N/A  
Avalon Bellevue Park (12)
  Bellevue, WA     220       373,843       1.8     2009     1,699     85.0%     88.9 % (3)     N/A       1,339       0.70 (3)     N/A  

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(1)   We own a fee simple interest in the communities listed, excepted as noted below.
 
(2)   Represents a community that was under redevelopment during the year, which could result in lower average economic occupancy and average rental rate per square foot for the year.
 
(3)   Represents a community that completed development or was purchased during the year, which could result in lower average economic occupancy and average rental rate per square foot for the year.
 
(4)   Represents the average rental revenue per occupied apartment home.
 
(5)   Costs are presented in accordance with GAAP. For current Development Communities, cost represents total costs incurred through December 31, 2009. Financial reporting costs are excluded for unconsolidated communities, see Note 6, “Investments in Real Estate Entities.”
 
(6)   We own a 15.2% combined general partnership and indirect limited partner equity interest in this community.
 
(7)   We own a general partnership interest in a partnership that owns a fee simple interest in this community.
 
(8)   We own a general partnership interest in a partnership structured as a DownREIT that owns this community.
 
(9)   We own a membership interest in a limited liability company that holds a fee simple interest in this community.
 
(10)   This community was transferred to a joint venture entity upon completion of development. We do not hold an equity interest in the entity, but retain a promoted residual interest in the profits of the entity. We receive a property management fee for this community.
 
(11)   Community is located on land subject to a land lease.
 
(12)   We own a 31.3% combined general partnership and indirect limited partner equity interest in this community.

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Development Communities
As of December 31, 2009, we had seven Development Communities under construction. We expect these Development Communities, when completed, to add a total of 2,438 apartment homes to our portfolio for a total capitalized cost, including land acquisition costs, of approximately $813,300,000. You should carefully review Item 1a., “Risk Factors,” for a discussion of the risks associated with development activity and our discussion under Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for further discussion of our 2010 outlook for development activity.
The following table presents a summary of the Development Communities. We hold a direct or indirect fee simple ownership interest in these communities except where noted.
                                                 
            Total                          
    Number of     capitalized                          
    apartment     cost (1)     Construction     Initial     Estimated     Estimated  
    homes     ($ millions)     start     occupancy (2)     completion     stabilization (3)  
1. Avalon Irvine
    279     $ 77.4       Q4 2007       Q2 2009       Q1 2010       Q3 2010  
Irvine, CA
                                               
2. Avalon Fort Greene
    631       306.8       Q4 2007       Q4 2009       Q1 2011       Q3 2011  
New York, NY
                                               
3. Avalon Walnut Creek (4)
    422       151.7       Q3 2008       Q2 2010       Q1 2011       Q3 2011  
Walnut Creek, CA
                                               
4. Avalon Norwalk
    311       86.4       Q3 2008       Q2 2010       Q2 2011       Q4 2011  
Norwalk, CT
                                               
5. Avalon Towers Bellevue
    396       126.1       Q4 2008       Q2 2010       Q2 2011       Q4 2011  
Bellevue, WA
                                               
6. Avalon Northborough II
    219       36.3       Q4 2009       Q2 2010       Q1 2011       Q3 2011  
Northborough, MA
                                               
7. Avalon at West Long Branch
    180       28.6       Q4 2009       Q3 2010       Q1 2011       Q3 2011  
West Long Branch, NJ
                                               
 
                                               
 
                                           
Total
    2,438     $ 813.3                                  
 
                                           
 
(1)   Total capitalized cost includes all capitalized costs projected to be or actually incurred to develop the respective Development Community, determined in accordance with GAAP, including land acquisition costs, construction costs, real estate taxes, capitalized interest and loan fees, permits, professional fees, allocated development overhead and other regulatory fees. Total capitalized cost for communities identified as having joint venture ownership, either during construction or upon construction completion, represents the total projected joint venture contribution amount.
 
(2)   Future initial occupancy dates are estimates. There can be no assurance that we will pursue to completion any or all of these proposed developments.
 
(3)   Stabilized operations is defined as the earlier of (i) attainment of 95% or greater physical occupancy or (ii) the one-year anniversary of completion of development.
 
(4)   This community is being financed in part by third party, tax-exempt debt.
Redevelopment Communities
As of December 31, 2009, we had seven consolidated communities under redevelopment. We expect the total capitalized cost to redevelop these communities to be $118,400,000, excluding costs prior to redevelopment. We have found that the cost to redevelop an existing apartment community is more difficult to budget and estimate than the cost to develop a new community. Accordingly, we expect that actual costs may vary from our budget by a wider range than for a new development community. We cannot assure you that we will meet our schedule for reconstruction completion or restabilized operations, or that we will meet our budgeted costs, either individually or in the aggregate. We anticipate increasing our redevelopment activity related to communities owned by the Funds, as well as communities in our current operating portfolio. You should carefully review Item 1a., “Risk Factors,” for a discussion of the risks associated with redevelopment activity.

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The following presents a summary of these Redevelopment Communities:
                                                 
            Total cost                              
    Number of     ($ millions)                     Estimated     Estimated  
    apartment     Pre-redevelopment     Total capitalized     Reconstruction     reconstruction     restabilized  
    homes     cost     cost (1)     start     completion     operations (2)  
1. Avalon Woodland Hills
    663     $ 72.1     $ 110.6       Q4 2007       Q2 2010       Q4 2010  
Woodland Hills, CA
                                               
2. Avalon at Diamond Heights
    154       25.3       30.6       Q4 2007       Q4 2010       Q2 2011  
San Francisco, CA
                                               
3. Avalon Burbank
    400       71.0       94.4       Q3 2008       Q3 2010       Q1 2011  
Burbank, CA
                                               
4. Avalon Pleasanton
    456       63.0       80.9       Q2 2009       Q4 2011       Q2 2012  
Pleasanton, CA
                                               
5. Avalon Watch
    512       30.2       49.9       Q2 2009       Q1 2012       Q3 2012  
West Windsor, NJ
                                               
6. Avalon at Cedar Ridge
    195       27.7       33.8       Q3 2009       Q1 2011       Q3 2011  
Daly City, CA
                                               
7. Avalon at Willow creek
    235       36.5       44.0       Q4 2009       Q1 2011       Q3 2011  
Fremont, CA
                                               
 
                                               
 
                                         
Total
    2,615     $ 325.8     $ 444.2                          
 
                                         
 
(1)   Total capitalized cost includes all capitalized costs projected to be or actually incurred to redevelop the respective Redevelopment Community, including land acquisition costs, construction costs, real estate taxes, capitalized interest and loan fees, permits, professional fees, allocated development overhead and other regulatory fees, all as determined in accordance with GAAP.
 
(2)   Restabilized operations is defined as the earlier of (i) attainment of 95% or greater physical occupancy or (ii) the one-year anniversary of completion of redevelopment.
Development Rights
As of December 31, 2009, we are evaluating the future development of 28 new apartment communities on land that is either owned by us, under contract, subject to a leasehold interest or for which we hold either a purchase or lease option. We generally prefer to hold Development Rights through options to acquire land, although for 14 of the Development Rights we currently own the land on which a community would be built if we proceeded with development. The Development Rights range from those beginning design and architectural planning to those that have completed site plans and drawings and can begin construction almost immediately. We estimate that the successful completion of all of these communities would ultimately add 7,180 apartment homes to our portfolio. Substantially all of these apartment homes will offer features like those offered by the communities we currently own. At December 31, 2009, there were cumulative capitalized costs (including legal fees, design fees and related overhead costs, but excluding land costs) of $87,763,000 relating to Development Rights. In addition, land costs related to the pursuit of Development Rights (consisting of original land and additional carrying costs) of $237,095,000 are reflected as land held for development as of December 31, 2009 on the Consolidated Balance Sheet of the Consolidated Financial Statements set forth in Item 8 of this report. In addition, we control certain land that is held for development under a 99-year land lease agreement, with future minimum obligations of approximately $6,500,000 per year.
The properties comprising the Development Rights are in different stages of the due diligence and regulatory approval process. The decisions as to which of the Development Rights to invest in, if any, or to continue to pursue once an investment in a Development Right is made, are business judgments that we make after we perform financial, demographic and other analyses. In the event that we do not proceed with a Development Right, we generally would not recover capitalized costs incurred in the pursuit of those communities, unless we were to recover amounts in connection with the sale of land; however, we cannot guarantee a recovery. Initial development costs incurred for pursuits for which future development is not yet considered probable are expensed as incurred. In addition, if the status of a Development Right changes, making future development no longer probable, any capitalized pre-development costs are charged to expense. During 2009, we incurred a charge of approximately $5,842,000 of pre-development cost for development rights that were not yet probable of future development at the

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time incurred, or for pursuits that we determined would not likely be developed. We also incurred a charge of $21,152,000 on three land parcels that were held for development that we do not currently intend to develop.
You should carefully review Section 1a., “Risk Factors,” for a discussion of the risks associated with Development Rights.
The table below presents a summary of these Development Rights:
                         
                    Total  
            Estimated     capitalized  
            number     cost  
        Location   of homes     ($ millions) (1)  
  1.    
Rockville Centre, NY Phase I
    210     $ 78  
  2.    
Greenburgh, NY Phase II
    288       77  
  3.    
Seattle, WA
    204       58  
  4.    
Lynnwood, WA Phase II
    82       18  
  5.    
Plymouth, MA Phase II
    92       20  
  6.    
Wilton, CT
    100       30  
  7.    
Wood-Ridge, NJ Phase I
    266       60  
  8.    
San Francisco, CA
    173       65  
  9.    
New York, NY
    691       307  
  10.    
Boston, MA
    180       97  
  11.    
Rockville Centre, NY Phase II
    139       51  
  12.    
Shelton, CT
    251       66  
  13.    
Roselle Park, NJ
    249       54  
  14.    
Garden City, NY
    160       51  
  15.    
Wood-Ridge, NJ Phase II
    140       32  
  16.    
Brooklyn, NY
    861       443  
  17.    
Rockville, MD
    239       57  
  18.    
Andover, MA
    115       26  
  19.    
Huntington Station, NY
    424       100  
  20.    
North Bergen, NJ
    164       47  
  21.    
Dublin, CA Phase II
    487       145  
  22.    
Seattle, WA II
    272       81  
  23.    
Cohasset, MA
    200       38  
  24.    
Stratford, CT
    130       22  
  25.    
Tysons Corner, VA
    338       87  
  26.    
Greenburgh, NY Phase III
    156       43  
  27.    
Yaphank, NY
    343       57  
  28.    
Hackensack, NJ
    226       48  
       
 
               
       
 
           
       
Total
    7,180     $ 2,258  
       
 
           
 
(1)   Total capitalized cost includes all capitalized costs incurred to date (if any) and projected to be incurred to develop the respective community, determined in accordance with GAAP, including land acquisition costs, construction costs, real estate taxes, capitalized interest and loan fees, permits, professional fees, allocated development overhead and other regulatory fees.

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Land Acquisitions
We select land for development and follow established procedures that we believe minimize both the cost and the risks of development. During 2009, we acquired the following two land parcels for development for an aggregate purchase price of approximately $11,951,000:
                                 
            Estimated     Total        
            number     capitalized        
    Gross     of apartment     cost (1)     Date  
    acres     homes     ($ millions)     acquired  
1. Avalon Northborough II
    8.3       219     $ 36     February 2009
Northborough, MA
                               
2. Avalon Willoughby West (2)
    4.2       861       443     September 2009
New York, NY
                               
 
                         
Total
    12.5       1,080     $ 479          
 
                         
 
(1)   Total capitalized cost includes all capitalized costs incurred to date (if any) and projected to be incurred to develop the respective community, determined in accordance with GAAP, including land acquisition costs, construction costs, real estate taxes, capitalized interest and loan fees, permits, professional fees, allocated development overhead and other regulatory fees.
 
(2)   This represents a portion of the aggregate land purchase that we will transact under a non-cancelable commitment related to this expected development, as discussed in Note 8, “Commitments and Contingencies,” of the Consolidated Financial Statements set forth in Item 8 of this report.
Other Land and Real Estate Assets
At December 31, 2009 we own land that we do not currently intend to develop with an aggregate carrying basis under GAAP of $96,356,000. We believe that the current carrying basis of these assets is such that there is no charge for impairment, or further charge in the case of assets previously impaired. However we may be subject to the recognition of further impairment charges in the event that there are indicators of such impairment, and we determine that the carrying basis of the assets is greater than the current fair value, less costs to dispose.
Recent Disposition Activity
We (i) sell assets that do not meet our long-term investment strategy or when capital and real estate markets allow us to realize a portion of the value created over the past business cycle and (ii) redeploy the proceeds from those sales to develop, redevelop and acquire communities. Pending such redeployment, we will generally use the proceeds from the sale of these communities to reduce amounts outstanding under our Credit Facility. On occasion, we will set aside the proceeds from the sale of communities into a cash escrow account to facilitate a non-taxable, like-kind exchange transaction. From January 1, 2009 to January 31, 2010, we sold our interest in six wholly owned communities, containing 1,332 apartment homes. The aggregate gross sales price for these assets was $225,125,000.
Insurance and Risk of Uninsured Losses
We carry commercial general liability insurance and property insurance with respect to all of our communities. These policies, and other insurance policies we carry, have policy specifications, insured limits and deductibles that we consider commercially reasonable. There are, however, certain types of losses (such as losses arising from acts of war) that are not insured, in full or in part, because they are either uninsurable or the cost of insurance makes it, in management’s view, economically impractical. You should carefully review the discussion under Item 1a., “Risk Factors,” of this Form 10-K for a discussion of risks associated with an uninsured property or liability loss.
Many of our West Coast communities are located in the general vicinity of active earthquake faults. Many of our communities are near, and thus susceptible to, the major fault lines in California, including the San Andreas Fault and the Hayward Fault. We cannot assure you that an earthquake would not cause damage or losses greater than

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insured levels. We have in place with respect to communities located in California and Washington, for any single occurrence and in the aggregate, $75,000,000 of coverage. Earthquake coverage outside of California and Washington is subject to a $100,000,000 limit each occurrence and in the aggregate. In California the deductible each occurrence is five percent of the insured value of each damaged building. Our earthquake insurance outside of California provides for a $100,000 deductible per occurrence except that the next $350,000 of loss per occurrence outside California will be treated as an additional self-insured retention until the total incurred self-insured retention exceeds $1,400,000.
On December 31, 2009, we elected to cancel and rewrite our property insurance policy for a 16 month term in order to take advantage of updated earthquake loss projections and declining insurance premium rates. As a result, our property insurance premium decreased by approximately 24% with no material changes in coverage. We expect to renew this policy when it expires on May 1, 2011.
In August 2009, we renewed our general liability policy and worker’s compensation coverage for a one year term, and experienced a decrease in the premium on these policies of approximately 25%, with no material changes in the coverage. These policies are in effect until August 1, 2010.
Just as with office buildings, transportation systems and government buildings, there have been reports that apartment communities could become targets of terrorism. In December 2007, Congress passed the Terrorism Risk Insurance Program Reauthorization Act (“TRIPRA”) which is designed to make terrorism insurance available through a federal back-stop program until 2014. In connection with this legislation, we have purchased insurance for property damage due to terrorism up to $250,000,000. Additionally, we have purchased insurance for certain terrorist acts, not covered under TRIPRA, such as domestic-based terrorism. This insurance, often referred to as “non-certified” terrorism insurance, is subject to deductibles, limits and exclusions. Our general liability policy provides TRIPRA coverage (subject to deductibles and insured limits) for liability to third parties that result from terrorist acts at our communities.
An additional consideration for insurance coverage and potential uninsured losses is mold growth. Mold growth may occur when excessive moisture accumulates in buildings or on building materials, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. If a significant mold problem arises at one of our communities, we could be required to undertake a costly remediation program to contain or remove the mold from the affected community and could be exposed to other liabilities. For further discussion of the risks and the Company’s related prevention and remediation activities, please refer to the discussion under Item 1a., “Risk Factors — We may incur costs due to environmental contamination or non-compliance,” elsewhere in this report. We cannot provide assurance that we will have coverage under our existing policies for property damage or liability to third parties arising as a result of exposure to mold or a claim of exposure to mold at one of our communities.
We also carry crime policies (also commonly referred to as a fidelity policy or employee dishonesty policy) that protect the Company, up to $5,000,000 per occurrence, from employee theft of money, securities or property.
ITEM 3. LEGAL PROCEEDINGS
As previously reported, we are involved in litigation alleging that communities constructed by us violate the accessibility requirements of the Fair Housing Act (“FHA”) and the Americans with Disabilities Act. The Equal Rights Center (“ERC”) filed a complaint against us on September 23, 2005 in the U.S. District Court, District of Maryland with respect to 100 properties. In November 2009, we settled this litigation by entering into a court approved consent decree. Under the consent decree we will inspect and, if necessary, remediate up to 8,250 apartment units and related public and common areas at our communities. We expect that the remediation resulting from the inspections, which should occur over approximately a four year period, will enhance and/or extend the useful life of the applicable communities and will therefore be capitalized. Although we will not be able to determine the exact remediation or associated costs until inspections are completed, we do not believe that the remediation costs will be material to the Company.

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On August 13, 2008 the U.S. Attorney’s Office for the Southern District of New York filed a civil lawsuit against the Company and the joint venture (CVP I, LLC) in which it has an interest that owns Avalon Chrystie Place. The lawsuit alleges that Avalon Chrystie Place was not designed and constructed in accordance with the accessibility requirements of the FHA. The Company designed and constructed Avalon Chrystie Place with a view to compliance with New York City’s Local Law 58, which for more than 20 years has been New York City’s code regulating the accessible design and construction of apartments. After the filing of its answer and affirmative defenses, during the fourth quarter of 2009 the plaintiff served the Company with discovery requests relating to communities owned by the Company nationwide. The Company objected to these discovery requests as being overly broad, as the plaintiff’s complaint made factual allegations with regard to Avalon Chrystie Place only. A magistrate judge agreed with the Company and limited discovery to Avalon Chrystie Place. The plaintiff is appealing the magistrate judge’s ruling. Due to the preliminary nature of the Department of Justice matter, including whether the scope of their suit will be extended to other properties, we cannot predict or determine the outcome of that matter, nor is it reasonably possible to estimate the amount of loss, if any, that would be associated with an adverse decision or settlement.
On August 1, 2008, we filed a lawsuit in the Superior Court of the State of Washington in the County of King (Avalon DownREIT V, L.P. v. Grand-Glacier, LLC et al) relating to our assertion that the homeowners association in which our former Avalon Wynhaven community is a part systematically overcharged us for various shared costs. We sold this property in 2008 and agreed to indemnify the buyer for annual association fees to the extent they exceed an amount that we each agreed was reasonable. The defendants have filed a cross-claim against Avalon DownREIT V, L.P. seeking foreclosure of the property and satisfaction of all amounts alleged to be due. We intend to vigorously pursue our claim and defend against the counter claim. We are negotiating a settlement of this litigation on terms that are not material to the Company’s operations or financial condition, but we cannot predict if or when we will settle this litigation, or the terms of a final judgment or settlement.
In addition to the matters described above, we are involved in various other claims and/or administrative proceedings that arise in the ordinary course of our business. While no assurances can be given, we do not believe that any of these other outstanding litigation matters, individually or in the aggregate, will have a material adverse effect on our operations.
ITEM 4. [RESERVED]

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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the NYSE under the ticker symbol AVB. The following table sets forth the quarterly high and low sales prices per share of our common stock for the years 2009 and 2008, as reported by the NYSE. On January 31, 2010 there were 648 holders of record of an aggregate of 81,546,465 shares of our outstanding common stock. The number of holders does not include individuals or entities who beneficially own shares but whose shares are held of record by a broker or clearing agency, but does include each such broker or clearing agency as one record holder.
                                                 
    2009   2008
    Sales Price   Dividends   Sales Price   Dividends
    High   Low   declared   High   Low   declared
Quarter ended March 31
  $ 61.87     $ 35.38     $ 0.8925     $ 105.98     $ 79.78     $ 0.8925  
Quarter ended June 30
  $ 66.71     $ 45.48     $ 0.8925     $ 107.37     $ 87.65     $ 0.8925  
Quarter ended September 30
  $ 78.75     $ 49.98     $ 0.8925     $ 109.45     $ 82.97     $ 0.8925  
Quarter ended December 31
  $ 87.79     $ 66.91     $ 0.8925     $ 96.68     $ 41.43     $ 2.7000  
At present, we expect to continue our policy of paying regular quarterly cash dividends. However, the form, timing and/or amount of dividend distributions will be declared at the discretion of the Board of Directors and will depend on actual cash from operations, our financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code and other factors as the Board of Directors may consider relevant. The Board of Directors may modify our dividend policy from time to time.
Dividends declared for the quarter ended December 31, 2008 included a special dividend, declared in December 2008, of $1.8075 per share (the “Special Dividend”) in conjunction with the fourth quarter 2008 regular dividend of $0.8925 per share. These dividends were paid in cash and common shares. The Special Dividend was declared to distribute a portion of the excess income attributable to gains on asset sales from the Company’s disposition activities during 2008. The Special Dividend was declared to qualify for the dividends paid deduction for tax purposes and minimize corporate level income taxes for 2008 and reduce federal excise taxes.
In February 2010, we announced that our Board of Directors declared a dividend on our common stock for the first quarter of 2010 of $0.8925 per share. The dividend will be payable on April 15, 2010 to all common stockholders as of March 31, 2010.

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Issuer Purchases of Equity Securities
                                 
                    (c)   (d)
                    Total Number of   Maximum Dollar Amount
                    Shares Purchased   that May Yet be Purchased
    (a)   (b)   as Part of Publicly   Under the Plans or
    Total Number of   Average Price Paid   Announced Plans or   Programs
    Shares Purchased   per Share   Programs   (in thousands)
Period   (1)   (1)   (2)   (2)
Month Ended October 31, 2009
    —     $ —       —     $ 200,000  
 
                               
Month Ended November 30, 2009
    —     $ —       —     $ 200,000  
 
                               
Month Ended December 31, 2009
    180     $ 86.59       —     $ 200,000  
 
(1)   Includes shares surrendered to the Company in connection with employee stock option exercises or vesting of restricted stock as payment of exercise price or as payment of taxes.
 
(2)   As disclosed in our Form 10-Q for the quarter ended March 31, 2008, represents amounts outstanding under the Company’s $500,000,000 Stock Repurchase Program. There is no scheduled expiration date to this program.
Information regarding securities authorized for issuance under equity compensation plans is included in the section entitled “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” in this Form 10-K.

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ITEM 6. SELECTED FINANCIAL DATA
The following table provides historical consolidated financial, operating and other data for the Company. You should read the table with our Consolidated Financial Statements and the Notes included in this report (dollars in thousands, except per share information).
                                         
    For the year ended  
    12-31-09     12-31-08     12-31-07     12-31-06     12-31-05  
Revenue:
                                       
Rental and other income
  $ 844,254     $ 807,656     $ 721,644     $ 633,674     $ 578,444  
Management, development and other fees
    7,328       6,568       6,142       6,259       4,304  
 
                             
Total revenue
    851,582       814,224       727,786       639,933       582,748  
 
                             
 
                                       
Expenses:
                                       
Operating expenses, excluding property taxes
    261,752       248,862       222,332       196,349       178,819  
Property taxes
    83,809       73,937       67,240       59,500       57,819  
Interest expense, net
    150,323       114,910       92,175       103,910       120,670  
(Gain) loss on extinguishment of debt, net
    25,910       (1,839 )     —       —       —  
Depreciation expense
    209,746       183,748       157,895       139,075       136,409  
General and administrative expense
    28,748       42,781       28,494       24,767       25,761  
Impairment loss — land holdings
    21,152       57,899       —       —       —  
 
                             
Total expenses
    781,440       720,298       568,136       523,601       519,478  
 
                             
 
                                       
Equity in income of unconsolidated entities
    1,441       4,566       59,169       7,455       7,198  
Gain on sale of land
    4,830       —       545       13,519       4,479  
 
                                       
Income from continuing operations
    76,413       98,492       219,364       137,306       74,947  
Discontinued operations:
                                       
Income from discontinued operations
    13,974       27,353       33,894       32,402       41,715  
Gain on sale of communities
    63,887       284,901       106,487       97,411       195,287  
 
                             
Total discontinued operations
    77,861       312,254       140,381       129,813       237,002  
 
                             
 
                                       
Net income
    154,274       410,746       359,745       267,119       311,949  
Net (income) loss attributable to redeemable noncontrolling interests
    1,373       741       (1,585 )     (573 )     (1,481 )
 
                             
Net income attributable to the Company
    155,647       411,487       358,160       266,546       310,468  
Dividends attributable to preferred stock
    —       (10,454 )     (8,700 )     (8,700 )     (8,700 )
 
                             
 
                                       
Net income attributable to common stockholders
  $ 155,647     $ 401,033     $ 349,460     $ 257,846     $ 301,768  
 
                             
Per Common Share and Share Information:
                                       
 
                                       
Earnings per common share — basic:
                                       
Income from continuing operations attributable to common stockholders (net of dividends attributable to preferred stock)
  $ 0.97     $ 1.15     $ 2.65     $ 1.73     $ 0.88  
Discontinued operations attributable to common stockholders
    0.97       4.06       1.78       1.74       3.24  
 
                             
Net income attributable to common stockholders
  $ 1.94     $ 5.21     $ 4.43     $ 3.47     $ 4.12  
 
                             
Weighted average shares outstanding — basic (1)
    79,951,348       76,783,515       78,680,043       74,125,795       72,952,492  
 
                                       
Earnings per common share — diluted:
                                       
Income from continuing operations attributable to common stockholders (net of dividends attributable to preferred stock)
  $ 0.96     $ 1.15     $ 2.62     $ 1.69     $ 0.87  
Discontinued operations attributable to common stockholders
    0.97       4.02       1.76       1.73       3.18  
 
                             
Net income attributable to common stockholders
  $ 1.93     $ 5.17     $ 4.38     $ 3.42     $ 4.05  
 
                             
Weighted average shares outstanding — diluted (2)
    80,599,657       77,578,852       79,856,927       75,586,898       74,759,318  
 
                                       
Cash dividends declared (3)
  $ 3.57     $ 3.57     $ 3.40     $ 3.12     $ 2.84  
 
(1)   Amounts include unvested restricted shares. Please refer to Note 1, “Organization and Basis of Presentation - Earnings per Common Share” of the Consolidated Financial Statements set forth in Item 8 of this report for a discussion of the calculation of Earnings per Share.
(2)   Weighted average common shares outstanding — diluted for 2008 includes the impact of approximately 2.6 million common shares issued under the special dividend declared on December 17, 2008.
(3)   Does not include the special dividend of $1.8075 per share, which was declared on December 17, 2008, and paid in the form of shares of the Company’s common stock.

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    For the year ended  
    12-31-09     12-31-08     12-31-07     12-31-06     12-31-05  
Other Information:
                                       
Net income attributable to the Company
  $ 155,647     $ 411,487     $ 358,160     $ 266,546     $ 310,468  
Depreciation — continuing operations
    209,746       183,748       157,895       139,075       136,409  
Depreciation — discontinued operations
    8,540       15,704       23,830       25,054       26,888  
Interest expense, net — continuing operations (1)
    176,233       113,071       92,175       103,910       120,670  
Interest expense, net — discontinued operations
    681       3,297       6,057       7,136       6,428  
 
                             
EBITDA (2)
  $ 550,847     $ 727,307     $ 638,117     $ 541,721     $ 600,863  
 
                             
 
                                       
Funds from Operations (3)
  $ 313,241     $ 315,947     $ 368,057     $ 320,199     $ 271,096  
Number of Current Communities (4)
    165       164       163       150       143  
Number of apartment homes
    47,926       45,728       45,932       43,141       41,412  
 
                                       
Balance Sheet Information:
                                       
Real estate, before accumulated depreciation
  $ 8,360,091     $ 8,002,487     $ 7,556,740     $ 6,615,593     $ 5,940,146  
Total assets
  $ 7,457,605     $ 7,174,353     $ 6,736,484     $ 5,848,507     $ 5,198,598  
Notes payable and unsecured credit facilities
  $ 3,974,872     $ 3,674,457     $ 3,208,202     $ 2,866,433     $ 2,334,017  
 
                                       
Cash Flow Information:
                                       
Net cash flows provided by operating activities
  $ 378,600     $ 386,855     $ 454,874     $ 351,660     $ 306,248  
Net cash flows used in investing activities
  $ (333,559 )   $ (266,309 )   $ (809,247 )   $ (511,371 )   $ (19,761 )
Net cash flows (used in) provided by financing activities
  $ (4,285 )   $ (75,111 )   $ 366,360     $ 162,280     $ (282,293 )
Notes to Selected Financial Data
(1)   Interest expense, net includes any loss or gain incurred from the extinguishment of debt.
 
(2)   EBITDA is defined as net income before interest income and expense, income taxes, depreciation and amortization from both continuing and discontinued operations. Under this definition, EBITDA includes gains on sale of assets and gain on sale of partnership interests. Management generally considers EBITDA to be an appropriate supplemental measure to net income of our operating performance because it helps investors to understand our ability to incur and service debt and to make capital expenditures. EBITDA should not be considered as an alternative to net income (as determined in accordance with GAAP), as an indicator of our operating performance, or to cash flows from operating activities (as determined in accordance with GAAP) as a measure of liquidity. Our calculation of EBITDA may not be comparable to EBITDA as calculated by other companies.
 
(3)   We generally consider Funds from Operations, or “FFO,” as defined below, to be an appropriate supplemental measure of our operating and financial performance because, by excluding gains or losses related to dispositions of previously depreciated property and excluding real estate depreciation, which can vary among owners of identical assets in similar condition based on historical cost accounting and useful life estimates, FFO can help one compare the operating performance of a real estate company between periods or as compared to different companies. We believe that in order to understand our operating results, FFO should be examined with net income as presented in the Consolidated Statements of Operations and Other Comprehensive Income included elsewhere in this report.
 
    Consistent with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trustsâ (“NAREIT”), we calculate FFO as net income or loss computed in accordance with GAAP, adjusted for:
  •   gains or losses on sales of previously depreciated operating communities;
 
  •   extraordinary gains or losses (as defined by GAAP);
 
  •   cumulative effect of change in accounting principle;
 
  •   depreciation of real estate assets; and
 
  •   adjustments for unconsolidated partnerships and joint ventures.
    FFO does not represent net income in accordance with GAAP, and therefore it should not be considered an alternative to net income, which remains the primary measure, as an indication of our performance. In addition, FFO as calculated by other REITs may not be comparable to our calculation of FFO.

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    FFO also does not represent cash generated from operating activities in accordance with GAAP, and therefore should not be considered an alternative to net cash flows from operating activities, as determined by GAAP, as a measure of liquidity. Additionally, it is not necessarily indicative of cash available to fund cash needs. A presentation of GAAP based cash flow metrics is provided in “Cash Flow Information” in the table on the previous page.
 
    The following is a reconciliation of net income to FFO (dollars in thousands, except per share data):
                                         
    For the year ended  
    12-31-09     12-31-08     12-31-07     12-31-06     12-31-05  
Net income attributable to the Company
  $ 155,647     $ 411,487     $ 358,160     $ 266,546     $ 310,468  
Dividends attributable to preferred stock
    —       (10,454 )     (8,700 )     (8,700 )     (8,700 )
Depreciation — real estate assets, including discontinued operations and joint venture adjustments
    221,415       203,082       184,731       165,982       163,252  
Distributions to noncontrolling interests, including discontinued operations
    66       216       280       391       1,363  
Gain on sale of unconsolidated entities holding previously depreciated real estate assets
    —       (3,483 )     (59,927 )     (6,609 )     —  
Gain on sale of previously depreciated real estate assets
    (63,887 )     (284,901 )     (106,487 )     (97,411 )     (195,287 )
 
                             
Funds from Operations attributable to common stockholders
  $ 313,241     $ 315,947     $ 368,057     $ 320,199     $ 271,096  
 
                             
 
                                       
Weighted average shares outstanding — diluted
    80,599,657       77,578,852       79,856,927       75,586,898       74,759,318  
FFO per common share — diluted
  $ 3.89     $ 4.07     $ 4.61     $ 4.24     $ 3.63  
(4)   Current Communities consist of all communities other than those which are still under construction and have not received a certificate of occupancy.

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ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help provide an understanding of our business and results of operations. This MD&A should be read in conjunction with our Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements included elsewhere in this report. This report, including the following MD&A, contains forward-looking statements regarding future events or trends that should be read in conjunction with the factors described under “Forward-Looking Statements” included in this report. In addition, our actual results or developments could differ materially from those projected in such forward-looking statements as a result of the factors discussed under “Forward-Looking Statements” as well as the risk factors described in Item 1a, “Risk Factors,” of this report.
Executive Overview
Business Description
We are primarily engaged in developing, acquiring, owning and operating apartment communities in high barrier to entry markets of the United States. We believe that apartment communities are an attractive long-term investment opportunity compared to other real estate investments, because a broad potential resident base should help reduce demand volatility over a real estate cycle. However, throughout the real estate cycle, apartment market fundamentals, and therefore operating cash flows, are affected by overall economic conditions. We seek to create long-term shareholder value by accessing capital on cost effective terms; deploying that capital to develop, redevelop and acquire apartment communities in high barrier to entry markets; operating apartment communities; and selling communities when they no longer meet our long-term investment strategy or when pricing is attractive. Barriers to entry in our markets generally include a difficult and lengthy entitlement process with local jurisdictions and dense urban or suburban areas where zoned and entitled land is in limited supply.
We regularly evaluate the allocation of our investments by the amount of invested capital and by product type within our individual markets, which are located in New England, the New York/New Jersey metro area, the Mid-Atlantic, the Midwest, the Pacific Northwest, and the Northern and Southern California regions of the United States. Our time-tested strategy is to be leaders in customer insight, market research and capital allocation, delivering a range of multifamily offerings tailored to serve the needs of the most attractive customer segments in the best-performing US submarkets. Our communities are predominately upscale, which generally command among the highest rents in their markets. However, we also pursue the ownership and operation of apartment communities that target a variety of customer segments and price points, consistent with our goal of offering a broad range of products and services.
Financial Highlights and Outlook
For the year ended December 31, 2009, net income available to common stockholders was $155,647,000 compared to $401,033,000 for 2008, a decrease of 61.2%. The decrease is primarily due to the reduced number of communities sold and amount of gains related to these sales in 2009 as compared to the prior year, coupled with the loss recognized on the tender offer completed in October 2009, offset somewhat by a decrease in charges for land impairments and abandoned pursuit costs. Detail of the impacts for the land impairments, abandoned pursuits as well as the charge for the tender offer and certain other non-routine items is provided in the following table.

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Non-Routine Items
Decrease (Increase) in Net Income and FFO
(dollars in thousands)
                 
    Full Year     Full Year  
    2008     2009  
Land impairments
  $ 57,899     $ 21,152  
Abandoned pursuits (1)
    6,611       1,139  
Severance and related costs
    3,400       4,500  
Federal excise tax
    3,200       515  
(Gain) loss on unsecured notes repurchase
    (1,839 )     25,910  
Gain on sale of land
    —       (4,830 )
Joint venture income adjustment (2)
    —       (1,294 )
Legal settlement proceeds, net
    —       (1,175 )
Preferred stock deferred offering expenses
    3,566       —  
Fund II organizational costs
    1,209       —  
 
           
 
               
Total non-routine items
  $ 74,046     $ 45,917  
 
           
 
               
Weighted Average Dilutive Shares Outstanding
    77,578,852       80,599,657  
 
(1)   For purposes of non-routine classification, abandoned pursuits includes costs we expensed for individual pursuits in excess of $1,000 in a given quarter.
 
 
(2)   Includes our promoted interest of $3,894 in joint venture, and our pro rata portion of an impairment charge on a community in an unconsolidated joint venture of $2,600.
Apartment fundamentals continued to be challenged during 2009. Job losses exceeded our expectations during the year, resulting in more than expected downward pressure on rental revenue. Our Established Community portfolio experienced a decline in year-over-year rental revenue of 3.7%, comprised of a decrease in rental rates of 3.1% and in economic occupancy of 0.6%. This decrease in revenues and an increase in operating expenses resulted in a decline in our Established Community portfolio NOI of 7.1% in 2009 from the prior year.
We expect Earnings per share — diluted (“EPS”) will decrease to $1.73 for 2010 from $1.93 in 2009, driven primarily by a decline in revenue and NOI from our Established Communities in 2010 as compared to the prior year. The recession, coupled with the short term nature of apartment leases, continues to adversely impact current operating fundamentals. The expected decline in our 2010 NOI is attributable largely to the effect of job losses experienced during the past two years. Employment is a leading demand driver, and we expect continued weak employment conditions to contribute to revenue declines in 2010. The impact of job losses on our results for 2010 may be somewhat offset by (i) the expected continued weakness in the for-sale housing market during 2010, (ii) growth in those age groups that have historically demonstrated a higher propensity to rent and (iii) constrained levels of new supply. Our current financial outlook for 2010 provides for a decline in rental revenue of between 3.0% and 4.5% in our Established Community portfolio resulting in a projected NOI decline for our Established Communities of 5.0% to 7.0%.
We were again active in the capital markets in 2009, raising in excess of $1,700,000,000 through the issuance of secured and unsecured debt, assets sales, sales of common equity in the public markets, and capital commitments for Fund II. We have used the proceeds received to fund our development and redevelopment activities, to acquire an indirect interest in assets through Fund II, to repay higher cost secured and unsecured debt, and to repay floating rate debt, while retaining substantial cash balances for general corporate purposes. Our focus on raising capital includes consideration for managing the maturity risk associated with our secured and unsecured debt obligations. Our 2009 activity includes the issuance of over $800,000,000 of secured financing and $500,000,000 of unsecured notes in September 2009 in two $250,000,000 tranches, one maturing in 2017 and the second maturing in 2020. A portion of the proceeds was used to repurchase $310,100,000 principal amount of some or all of the amounts outstanding on unsecured notes maturing over the next three years, effectively extending the duration of debt maturities while reducing interest costs. We believe that our relatively modest level of secured and unsecured debt will continue to provide financial flexibility to access capital on attractive terms.

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The funds raised from dispositions consist of the proceeds from the sale of five communities for a gross sales price of $179,675,000. We anticipate our level of disposition activity will be consistent in 2010, within the range of gross sales of $180,000,000 to $200,000,000, occurring primarily during the first half of the year
During 2009 we completed the development of nine communities for an aggregate total capitalized cost of $810,700,000. We started the development of two communities, which are expected to be completed for an estimated total capitalized cost of $64,900,000.
We expect an increase in investor demand for quality multifamily assets, due in part to the increased liquidity in the capital markets and constrained supply resulting from the decline in development activity in all markets. While we reduced our level of development during 2009 in response to the general deterioration in real estate and capital market conditions, we believe that our development activity will continue to create long-term value. During 2010, we expect to use our core competency in development to deliver new assets into the market for a recovery in apartment fundamentals that we expect in 2011 and 2012. We anticipate new development starts in 2010 with a total projected capitalized cost of $380,000,000. Consistent with this view, we also expect to increase redevelopment activity for our wholly owned communities in 2010, during which we expect to start redevelopment of seven wholly owned communities.
During 2010, we expect to disburse approximately $500,000,000 related to the seven communities under development at December 31, 2009, the new development starts, and anticipated acquisitions of land for future development. We expect approximately $50,000,000 of the projected 2010 disbursements will be funded from cash in escrow related to previously sourced tax-exempt debt. We believe that our current level of indebtedness, our current ability to service interest and other fixed charges and our current limited use of financial encumbrances (such as secured financing) will provide adequate access to the capital necessary to fund our development and redevelopment activities during 2010. We expect to meet our liquidity needs from the issuance of corporate securities (which could include unsecured debt and/or common and preferred equity) and secured debt, as well as from disposition proceeds, joint ventures or from retained cash. We believe that the current market provides for an opportunity to perform certain scheduled maintenance and repositioning activities at attractive costs due to a continued decline in costs for construction materials and labor.
We increase our direct and indirect interests in communities through development and acquisitions. While we grow principally through our demonstrated core competency of developing wholly owned assets from capital sources, we also acquire interests in additional assets, primarily through our investment in Fund II.
Fund I is a discretionary investment fund with nine institutional investors, including us. One of our wholly owned subsidiaries is the general partner of Fund I and has invested approximately $50,000,000 in Fund I, representing a 15.2% combined general partner and limited partner equity interest. Fund I was our principal vehicle for acquiring apartment communities through the close of its investment period in March 2008. Subsidiaries of Fund I have 21 loans secured by individual assets with amounts outstanding in the aggregate of $436,410,000 with varying maturity dates (or dates after which the loans can be prepaid without penalty), ranging from October 2011 to September 2016. These mortgage loans are secured by the underlying real estate.
Fund II is a second discretionary investment fund with six institutional investors, including us. One of our wholly owned subsidiaries is the general partner of Fund II. Fund II was formed in August 2008 and, in the second quarter of 2009, we added equity commitments for Fund II, resulting in total equity commitments from five institutional investors and us of $400,000,000, of which our commitment is $125,000,000. Total equity commitments to Fund II in the second quarter of 2009 increased by $67,000,000 as a result of the following:
  •   a new institutional investor made an equity commitment of $75,000,000;
 
  •   an existing institutional investor increased its commitment by $17,000,000, based on terms of its existing commitment; and
 
  •   we decreased our commitment by $25,000,000 to $125,000,000, based on terms of our existing commitment, decreasing our equity interest to approximately 31%.

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Fund II can employ leverage of up to 65%, allowing for a total investment capacity of approximately $1,100,000,000, and has a term that expires in August 2018, plus two one-year extension options. Fund II now serves as the exclusive vehicle through which we will acquire investment interests in apartment communities until August 2011 or, if earlier, until 90% of the committed capital of Fund II is invested, subject to limited exceptions. Fund II will not include or involve our development activities. We will receive, in addition to any returns on invested equity, asset management fees, property management fees and redevelopment fees. We will also receive a promoted interest if certain return thresholds are met.
In 2009, Fund II acquired two communities, Avalon Bellevue Park, a 220 apartment-home community located in Bellevue, Washington and The Hermitage, a 491 apartment-home community located in Fairfax, Virginia. Fund II has invested $104,330,000 as of December 31, 2009. Fund II has one loan secured by an asset in the amount of $21,515,000 with a maturity of June 2019. This loan is payable by Fund II. As of December 31, 2009, Fund II also has $30,200,000 outstanding under a credit facility that matures in December 2010.
In February 2010, Fund II acquired its third community, a 203 apartment-home community located in Gaithersburg, Maryland.
Communities Overview
Our real estate investments consist primarily of current operating apartment communities, Development Communities, and Development Rights. Our current operating communities are further distinguished as Established Communities, Other Stabilized Communities, Lease-Up Communities and Redevelopment Communities. Established Communities are generally operating communities that are consolidated for financial reporting purposes and were owned and had stabilized occupancy and operating expenses as of the beginning of the prior year, which allows the performance of these communities and the markets in which they are located to be compared and monitored between years. Other Stabilized Communities are generally all other consolidated operating communities that have stabilized occupancy and operating expenses during the current year, but had not achieved stabilization as of the beginning of the prior year. Lease-Up Communities consist of communities where construction is complete but stabilization has not been achieved. Redevelopment Communities consist of communities where substantial redevelopment is in progress or is planned to begin during the current year. A more detailed description of our reportable segments and other related operating information can be found in Note 9, “Segment Reporting,” of our Consolidated Financial Statements.
Although each of these categories is important to our business, we generally evaluate overall operating, industry and market trends based on the operating results of Established Communities, for which a detailed discussion can be found in “Results of Operations” as part of our discussion of overall operating results. We evaluate our current and future cash needs and future operating potential based on acquisition, disposition, development, redevelopment and financing activities within Other Stabilized, Redevelopment and Development Communities. Discussions related to these segments of our business can be found in “Liquidity and Capital Resources.”
NOI of our current operating communities is one of the financial measures that we use to evaluate community performance. NOI is affected by the demand and supply dynamics within our markets, our rental rates and occupancy levels and our ability to control operating costs. Our overall financial performance is also impacted by the general availability and cost of capital and the performance of newly developed and acquired apartment communities.
As of December 31, 2009, we owned or held a direct or indirect ownership interest in 172 apartment communities containing 50,364 apartment homes in ten states and the District of Columbia, of which seven communities were under construction and seven communities were under reconstruction. Of these communities, 24 were owned by entities that were not consolidated for financial reporting purposes, including 19 owned by subsidiaries of Fund I and two owned by subsidiaries of Fund II. In addition, we owned a direct or indirect ownership interest in Development Rights to develop an additional 28 wholly owned communities that, if developed in the manner expected, will contain an estimated 7,180 apartment homes.
Results of Operations

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Our year-over-year operating performance is primarily affected by both overall and individual geographic market conditions and apartment fundamentals and reflected in changes in NOI of our Established Communities; NOI derived from acquisitions and development completions; the loss of NOI related to disposed communities; and capital market and financing activity. A comparison of our operating results for 2009, 2008 and 2007 follows (dollars in thousands):
                                                                 
    2009     2008     $ Change     % Change     2008     2007     $ Change     % Change  
Revenue:
                                                               
Rental and other income
  $ 844,254     $ 807,656     $ 36,598       4.5 %   $ 807,656     $ 721,644     $ 86,012       11.9 %
Management, development and other fees
    7,328       6,568       760       11.6 %     6,568       6,142       426       6.9 %
 
                                               
Total revenue
    851,582       814,224       37,358       4.6 %     814,224       727,786       86,438       11.9 %
 
                                               
 
                                                               
Expenses:
                                                               
Direct property operating expenses, excluding property taxes
    214,507       191,690       22,817       11.9 %     191,690       171,968       19,722       11.5 %
Property taxes
    83,809       73,937       9,872       13.4 %     73,937       67,240       6,697       10.0 %
 
                                               
Total community operating expenses
    298,316       265,627       32,689       12.3 %     265,627       239,208       26,419       11.0 %
 
                                               
 
                                                               
Corporate-level property management and other indirect operating expenses
    37,559       39,874       (2,315 )     (5.8 %)     39,874       38,627       1,247       3.2 %
Investments and investment management expense
    3,844       4,787       (943 )     (19.7 %)     4,787       4,763       24       0.5 %
Expensed development and other pursuit costs
    5,842       12,511       (6,669 )     (53.3 %)     12,511       6,974       5,537       79.4 %
Interest expense, net
    150,323       114,910       35,413       30.8 %     114,910       92,175       22,735       24.7 %
(Gain) loss on extinguishment of debt, net
    25,910       (1,839 )     27,749       (1,508.9 %)     (1,839 )     —       (1,839 )     N/A  
Depreciation expense
    209,746       183,748       25,998       14.1 %     183,748       157,895       25,853       16.4 %
General and administrative expense
    28,748       42,781       (14,033 )     (32.8 %)     42,781       28,494       14,287       50.1 %
Impairment loss
    21,152       57,899       (36,747 )     (63.5 %)     57,899       —       57,899       N/A  
Gain on sale of land
    (4,830 )     —       (4,830 )     N/A       —       (545 )     545       (100.0 %)
 
                                               
Total other expenses
    478,294       454,671       23,623       5.2 %     454,671       328,383       126,288       38.5 %
 
                                               
 
                                                               
Equity in income of unconsolidated entities
    1,441       4,566       (3,125 )     (68.4 %)     4,566       59,169       (54,603 )     (92.3 %)
 
                                               
 
                                                               
Income from continuing operations
    76,413       98,492       (22,079 )     (22.4 %)     98,492       219,364       (120,872 )     (55.1 %)
 
                                                               
Discontinued operations:
                                                               
Income from discontinued operations
    13,974       27,353       (13,379 )     (48.9 %)     27,353       33,894       (6,541 )     (19.3 %)
Gain on sale of communities
    63,887       284,901       (221,014 )     (77.6 %)     284,901       106,487       178,414       167.5 %
 
                                               
Total discontinued operations
    77,861       312,254       (234,393 )     (75.1 %)     312,254       140,381       171,873       122.4 %
 
                                               
 
                                                               
Net income
    154,274       410,746       (256,472 )     (62.4 %)     410,746       359,745       51,001       14.2 %
Net (income) loss attributable to redeemable noncontrolling interests
    1,373       741       632       85.3 %     741       (1,585 )     2,326       (146.8 %)
 
                                               
Net income attributable to the Company
    155,647       411,487       (255,840 )     (62.2 %)     411,487       358,160       53,327       14.9 %
Dividends attributable to preferred stock
    —       (10,454 )     10,454       (100.0 %)     (10,454 )     (8,700 )     (1,754 )     20.2 %
 
                                               
Net income attributable to common stockholders
  $ 155,647     $ 401,033     $ (245,386 )     (61.2 %)   $ 401,033     $ 349,460     $ 51,573       14.8 %
 
                                               
Net income attributable to common stockholders decreased $245,386,000 or 61.2%, to $155,647,000 in 2009 primarily due to the reduced number of communities sold and amount of gains related to these sales in 2009 as compared to the prior year and the loss recognized on the early repurchase of debt completed in October 2009. The overall decline in net income was mitigated by a reduction in charges for land impairments and abandoned pursuit costs between years. Net income attributable to common stockholders increased $51,573,000 or 14.8% in 2008 over the prior year period due primarily to gains from the sale of communities and year-over-year increases in community operating performance, partially offset by charges associated with land impairments and abandoned pursuits as well as increased costs for interest and depreciation.
NOI is considered by management to be an important and appropriate supplemental performance measure to net income because it helps both investors and management to understand the core operations of a community or communities prior to the allocation of any corporate-level or financing-related costs. NOI reflects the operating performance of a community and allows for an easy comparison of the operating performance of individual assets or groups of assets. In addition, because prospective buyers of real estate have different financing and overhead structures, with varying marginal impacts to overhead by acquiring real estate, NOI is considered by many in the real estate industry to be a useful measure for determining the value of a real estate asset or group of assets. We define NOI as total property revenue less direct property operating expenses, including property taxes.
NOI does not represent cash generated from operating activities in accordance with GAAP. Therefore, NOI should not be considered an alternative to net income as an indication of our performance. NOI should also not be considered an alternative to net cash flow from operating activities, as determined by GAAP, as a measure of liquidity, nor is NOI necessarily indicative of cash available to fund cash needs. Reconciliations of NOI for the years ended December 31, 2009, 2008 and 2007 to net income for each year, are as follows (dollars in thousands):

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    For the year ended  
    12-31-09     12-31-08     12-31-07  
Net income
  $ 154,274     $ 410,746     $ 359,745  
Indirect operating expenses, net of corporate income
    30,315       33,010       31,285  
Investments and investment management expense
    3,844       4,787       4,763  
Expensed development and other pursuit costs
    5,842       12,511       6,974  
Interest expense, net
    150,323       114,910       92,175  
(Gain) loss on extinguishment of debt, net
    25,910       (1,839 )     —  
General and administrative expense
    28,748       42,781       28,494  
Equity in income of unconsolidated entities
    (1,441 )     (4,566 )     (59,169 )
Depreciation expense
    209,746       183,748       157,895  
Impairment loss — land holdings
    21,152       57,899       —  
Gain on sale of real estate assets
    (68,717 )     (284,901 )     (107,032 )
Income from discontinued operations
    (13,974 )     (27,353 )     (33,894 )
 
                 
 
                       
Net operating income
  $ 546,022     $ 541,733     $ 481,236  
 
                 
The NOI increases for both 2009 and 2008, as compared to the prior year period, consist of changes in the following categories (dollars in thousands):
                 
    Full Year     Full Year  
    2009     2008  
Established Communities
  $ (29,707 )   $ 19,160  
 
               
Other Stabilized Communities
    14,228       44,722  
 
               
Development and Redevelopment Communities
    19,768       (3,385 )
 
           
 
               
Total
  $ 4,289     $ 60,497  
 
           
The NOI decrease in Established Communities in 2009 is due to the rental revenue declines as a result of the job losses experienced in 2008 and 2009, coupled with increases in community operating expenses. During 2009, we focused on minimizing rental rate declines, while maintaining occupancy of at least 94% in all regions.
We anticipate that rental rates and occupancy levels will decline in 2010 such that overall rental revenue will decline between 3.0% and 4.5%. The projected revenue decline is due to our expectation of continued job losses at least through the second quarter of 2010. Expense growth also impacts growth in NOI and we continue to monitor and manage operating expenses to constrain expense growth. We expect operating expenses to be flat in 2010 from prior year levels. As a result, we expect NOI for our Established Communities to decline between 5.0% and 7.0%. These projections are based on our outlook for employment conditions and apartment market fundamentals in 2010, both nationally and in the markets where we operate, as well as the individual demand/supply characteristics of each submarket in which we operate. There can be no assurance that our outlook for economic conditions and/or their impact on our operating results will be accurate, and actual results could differ materially. Please see “Risk Factors,” “Forward-Looking Statements” and other discussions in this report on Form 10-K for a discussion of factors which could affect our results of operations.
Rental and other income increased in 2009 as compared to the prior year due to additional rental income generated from newly developed communities, offset somewhat by decreased rental rates and occupancy for our Established Communities. Rental and other income increased in 2008 as compared to the prior year due to increased rental rates and occupancy for our Established Communities, coupled with additional rental income generated from newly developed communities.
    Overall Portfolio — The weighted average number of occupied apartment homes increased to 38,233 apartment homes for 2009 as compared to 37,886 homes for 2008 and 38,436 homes for 2007. The increase in 2009 over 2008 is due to homes available from newly developed communities, offset partially by communities sold during 2009, as well as declining occupancy levels due to the economic slow down.

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    The weighted average monthly revenue per occupied apartment home decreased to $1,910 for 2009 as compared to $1,921 in 2008 and $1,767 in 2007.
 
    Established Communities — Rental revenue decreased $22,370,000, or 3.7%, for 2009 and increased $18,221,000, or 3.1%, for 2008. The decrease in 2009 from 2008 is due primarily to lower rental rates. For 2009, the weighted average monthly revenue per occupied apartment home decreased 3.1% to $1,869 compared to $1,929 in 2008. There was a slight change in year-over-year average economic occupancy for 2009 down 0.6% to 95.6% compared to 96.2% in 2008. The increase in rental revenue in 2008 over the prior year is due entirely to increased average rental rates. Economic occupancy takes into account the fact that apartment homes of different sizes and locations within a community have different economic impacts on a community’s gross revenue. Economic occupancy is defined as gross potential revenue less vacancy loss, as a percentage of gross potential revenue. Gross potential revenue is determined by valuing occupied homes at leased rates and vacant homes at market rents.
We experienced decreases in Established Communities’ rental revenue in all six of our regions for 2009 as compared to the prior year period as discussed in more detail below.
    The Metro New York/New Jersey region, which accounted for approximately 26% of Established Community rental revenue for 2009, experienced a decrease in rental revenue of 4.3% for 2009 as compared to 2008. Average rental rates decreased 4.1% to $2,288, and economic occupancy decreased 0.2% to 95.9% for 2009 as compared to 2008. During 2009, the trend of weakening rental market conditions in both New York City and surrounding suburban markets resulting from the recession is reflected in the declining rental rates in the second half of 2009. The challenges facing the financial services industry drive the region’s current expectation for job growth, which is expected to lag the U.S. average and our other markets.
 
    The Mid-Atlantic/Midwest region, which represented approximately 21% of Established Community rental revenue during 2009, experienced a decrease in rental revenue of 0.6% as compared to 2008. Average rental rates decreased by 0.7% to $1,729, while economic occupancy increased by 0.1% from 96.4% to 96.5% for 2009 as compared to 2008. This region continues to benefit from the impact of government and government services employment, which has served to stabilize the economy relative to other regions.
 
    The New England region accounted for approximately 21% of the Established Community rental revenue for 2009 and experienced a rental revenue decrease of 4.0% over the prior year. Average rental rates decreased 2.9% to $1,984 and economic occupancy decreased 1.1% to 95.2% for 2009, as compared to 2008. Given the significance of the financial services industry in the Boston metro area, as well as the impact of New York trends on Fairfield-New Haven, we expect the job recovery to be slow.
 
    Northern California accounted for approximately 17% of the Established Community rental revenue for 2009 and experienced a rental revenue decrease of 4.7% over the prior year. Average rental rates decreased 4.1% to $1,923 and economic occupancy decreased by 0.6% to 96.2% for 2009 as compared to 2008. The region’s employment base, with its above-average exposure to high-technology industries, can result in greater volatility in rental revenue changes relative to other regions.
 
    Southern California accounted for approximately 11% of the Established Community rental revenue for 2009 and experienced a rental revenue decrease of 5.0% over the prior year. Average rental rates decreased 3.8% to $1,509, and economic occupancy decreased by 1.2% to 94.1% for 2009 as compared to 2008.
 
    The Pacific Northwest region accounted for approximately 5% of the Established Community rental revenue for 2009 and experienced a rental revenue decrease of 5.0% over the prior year. Average rental rates decreased 3.7% to $1,282 and economic occupancy decreased by 1.3% to 94.2% for 2009 as compared to 2008. The Pacific Northwest also has a large presence of technology based employment, a contributing factor to the greater degree of volatility in rental rates. We believe a recovery in apartment fundamentals in the Pacific Northwest is likely to lag other AvalonBay regions given an increased level of housing supply in many submarkets.

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In accordance with GAAP, cash concessions are amortized as an offset to rental revenue over the approximate lease term, which is generally one year. As a supplemental measure, we also present rental revenue with concessions stated on a cash basis to help investors evaluate the impact of both current and historical concessions on GAAP based rental revenue and to more readily enable comparisons to revenue as reported by other companies. Rental revenue with concessions stated on a cash basis also allows investors to understand historical trends in cash concessions, as well as current rental market conditions.
The following table reconciles total rental revenue in conformity with GAAP to total rental revenue adjusted to state concessions on a cash basis for our Established Communities for the years 2009 and 2008 (dollars in thousands). Information for the year ended December 31, 2007 is not presented, as Established Community classification is not comparable prior to January 1, 2008. See Note 9, “Segment Reporting,” of our Consolidated Financial Statements.
                 
    For the year ended  
    12-31-09     12-31-08  
Rental revenue (GAAP basis)
  $ 587,752     $ 610,122  
Concessions amortized
    8,000       6,771  
Concessions granted
    (6,361 )     (8,004 )
 
           
 
               
Rental revenue adjusted to state concessions on a cash basis
  $ 589,391     $ 608,889  
 
           
 
               
Year-over-year % change — GAAP revenue
    (3.7 %)     n/a  
 
               
Year-over-year % change — cash concession based revenue
    (3.2 %)     n/a  
Management, development and other fees increased $760,000, or 11.6%, in 2009 and increased $426,000, or 6.9% in 2008. The increase in 2009 was due primarily to increased asset and property management fees from Fund II. The increase in 2008 was due primarily to increased redevelopment fees and property management fees as additional communities were acquired by subsidiaries of Fund I.
Direct property operating expenses, excluding property taxes increased $22,817,000, or 11.9% in 2009 and increased $19,722,000, or 11.5% for 2008 as compared to the prior year periods, primarily due to the addition of recently developed apartment homes coupled with increased administrative expense due primarily to increases in bad debt expense due to the recession.
For Established Communities, direct property operating expenses, excluding property taxes, increased $6,411,000, or 4.8% to $139,955,000 for 2009 and $328,000, or 0.2% to $133,544,000 for 2008, due primarily to increased administrative and community maintenance related costs, offset partially by a decrease in insurance and utility related expenses. The increases in administrative expense are primarily due to increased bad debt.
Property taxes increased $9,872,000, or 13.4% and $6,697,000, or 10.0% in 2009 and 2008, respectively, due to the addition of newly developed and redeveloped apartment homes and overall higher assessments. Property tax increases are also impacted by the size and timing of successful tax appeals.
For Established Communities, property taxes increased by $1,242,000, or 2.1% and $3,515,000, or 6.2% for 2009 and 2008, respectively over the prior year, due to both higher assessments throughout all regions and reductions in property taxes realized in 2008 that did not occur in 2009. The impact of the current economic environment has not been reflected in current assessments, as there is typically a time lag between a change in the economy affecting property valuations and updated real estate tax assessments. We expect property taxes in 2010 to increase over 2009 due primarily to higher tax rates, without the benefit of lower assessed values. For communities in California, property tax changes are determined by the change in the California Consumer Price Index, with increases limited by law (Proposition 13). We evaluate property tax increases internally, and also engage third-party consultants to assist in our evaluations. We appeal property tax increases when appropriate.

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Corporate-level property management and other indirect operating expenses decreased by $2,315,000, or 5.8% in 2009 and increased $1,247,000, or 3.2% in 2008 over the prior year periods. The decrease in 2009 over 2008 is due primarily to decreases in compensation costs, coupled with a reduction in costs associated with the initial start up of our Customer Care Center, discussed below. The increase in 2008 over the prior year is due primarily to increased compensation and employee separation costs, as well as costs relating to the initial start up of the Customer Care Center and other corporate initiatives focused on increasing efficiency and enhancing controls at our operating communities. The Customer Care Center in Virginia Beach, Virginia opened in 2007 and expanded in 2008 to centralize certain community-related accounting, administrative and customer service functions.
Investments and investment management reflects the costs incurred for investment acquisitions and investment management. Investments and investment management costs decreased in 2009 by $943,000 or 19.7% from the prior year due primarily to lower compensation and travel-related costs.
Expensed development and other pursuit costs primarily reflect the costs incurred for abandoned pursuit costs, which include costs incurred for development pursuits not yet considered probable for development, as well as the abandonment of Development Rights and disposition pursuits. Expensed development and other pursuit costs increased in 2008 as compared to 2007 and 2009 due to increases in abandoned development pursuits in response to the economic decline and deteriorating market conditions in 2008. These costs can be volatile, particularly in periods of economic downturn or when there is limited access to capital, and the costs may vary significantly from period to period.
Interest expense, net increased $35,413,000, or 30.8% and $22,735,000, or 24.7% in 2009 and 2008, respectively over the prior years. This category includes interest expense offset by interest capitalized, and interest income. The increase in 2009 is due primarily to a decrease in the amount of interest capitalized in 2009 as compared to the prior year, coupled with increased interest expense in 2009 compared to 2008 from additional secured and unsecured debt issued to fund development activity. The decrease in interest capitalized is due to the reduction in development activity in 2009 as compared to 2008. The increase in 2008 over the prior year is due primarily to a decrease in interest income in 2008 as compared to the prior year period, coupled with increased interest expense in 2008 compared to 2007. The higher level of interest income in 2007 is due to higher invested cash balances from our January 2007 equity offering. The increased interest expense in 2008 is due primarily to increased amounts of debt outstanding in 2008 compared to the prior year.
(Gain) loss on the extinguishment of debt, net reflects the impact of our debt repurchase activity for payments above or below the carrying basis. The net loss in 2009 is due to the $310,100,000 in unsecured notes that we purchased prior to their scheduled maturity at a premium, offset by the gain recognized from our January 2009 tender offer.
Depreciation expense increased in 2009 and 2008 primarily due to the net increase in assets from the completion of development and redevelopment activities, offset by assets sold during the year.
General and administrative expense (“G&A”) decreased $14,033,000, or 32.8% in 2009 and increased $14,287,000, or 50.1% in 2008 as compared to the prior years. The increase in 2008 as compared to 2007 and 2009 is due primarily to higher severance and related costs in 2008 associated with the decrease in our planned development activity, higher federal excise tax expense in 2008 resulting from gains on disposition activity and organization costs for the formation of Fund II incurred in 2008.
Impairment loss for 2009 is due to the write down of three land parcels which we do not currently plan on developing. Impairment loss in 2008 is due primarily to the write down of eight land parcels which we did not plan on developing at the time. We did not recognize an impairment loss in 2007.
Gain on sale of land for 2009 increased primarily due to the sale of two land parcels in 2009, without comparable activity in the prior year.
Equity in income of unconsolidated entities for 2009 decreased from the prior year period due primarily to the recognition of our proportionate amount of an impairment loss that one of our unconsolidated investments recognized on one of its operating communities in 2009. In addition, gains from both the sale of a community by an

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unconsolidated joint venture as well as from an investment in a joint venture formed to develop for sale homes occurred in 2008 that were not present in 2009. These amounts were partially offset by the recognition of our promoted interest in the joint venture that owns Avalon Chrystie Place in 2009. The decrease in 2008 from the prior year is due primarily to the gain on the sale of two partnership interests in 2007 and the related loss of partnership income, partially offset by our portion of the gain from the sale of a community by a joint venture partner, income from joint ventures where the underlying communities have achieved stabilized operations and gains from our investment in a joint venture formed to develop for-sale homes.
Income from discontinued operations represents the net income generated by communities sold or qualifying as discontinued operations during the period from January 1, 2007 through December 31, 2009. This income decreased for 2009 and 2008 due to an increased number of communities sold in each year as compared to the prior year period. See Note 7, “Real Estate Disposition Activities,” of our Consolidated Financial Statements.
Gain on sale of communities decreased in 2009 and increased in 2008 as compared to the prior year periods as a result of changes in the sales volume and associated gains in each respective year. The amount of gain realized upon disposition of a community depends on many factors, including the number of communities sold, the size and carrying value of those communities and the market conditions in the local area.
Net (income) loss attributable to redeemable noncontrolling interests for 2009 resulted in income of $1,373,000 compared to income of $741,000 in 2008 due primarily to recognition of income for our joint venture partners’ portion of expenses incurred by Fund II, as well as the conversion and redemption of limited partnership units in 2008 and 2009, thereby reducing outside ownership interests and the allocation of net income to outside ownership interests.
FFO
FFO is considered by management to be an appropriate supplemental measure of our operating and financial performance. In calculating FFO, we exclude gains or losses related to dispositions of previously depreciated property and exclude real estate depreciation, which can vary among owners of identical assets in similar condition based on historical cost accounting and useful life estimates. FFO can help one compare the operating performance of a real estate company between periods or as compared to different companies. We believe that in order to understand our operating results, FFO should be examined with net income as presented in our Consolidated Financial Statements included elsewhere in this report. For a more detailed discussion and presentation of FFO, see “Selected Financial Data,” included in Item 6 of this report.
Liquidity and Capital Resources
We believe our principal short-term liquidity needs are to fund:
  •   development and redevelopment activity in which we are currently engaged;
 
  •   the minimum dividend payments on our common stock required to maintain our REIT qualification under the Internal Revenue Code of 1986;
 
  •   debt service and principal payments either at maturity or opportunistic payments;
 
  •   normal recurring operating expenses;
 
  •   DownREIT partnership unit distributions; and
 
  •   capital calls for Fund II, as required.
Factors affecting our liquidity and capital resources are our cash flows from operations, financing activities and investing activities (including dispositions) as well as general economic and market conditions. Operating cash flow has historically been determined by: (i) the number of apartment homes currently owned, (ii) rental rates, (iii) occupancy levels and (iv) operating expenses with respect to apartment homes. The timing and type of capital markets activity in which we engage, as well as our plans for development, redevelopment, acquisition and disposition activity, are affected by changes in the capital markets environment, such as changes in interest rates or the availability of cost-effective capital. We regularly review our liquidity needs, the adequacy of cash flows from operations and other expected liquidity sources to meet these needs.

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During 2009 we saw access to liquidity improve as credit and equity markets recovered. During 2009, we raised in excess of $1,700,000,000 in the form of secured debt, unsecured debt and public and private equity. In 2010, we expect to meet all of our liquidity needs from a variety of internal and external sources, including cash balances on hand, borrowing capacity under our Credit Facility (as defined below), secured financings and other public or private sources of liquidity as discussed below, as well as our operating activities. To the extent that currently available internal and external resources do not satisfy our needs, we may seek additional external financing. Additional external financing could come from a variety of sources, such as public sales of debt or equity securities or unsecured or secured loans from financial institutions or other private or governmental lenders, among others. Private equity through joint ventures may also be used. Our ability to obtain additional financing will depend on a variety of factors such as market conditions, the general availability of credit, the overall availability of credit to the real estate industry, our credit ratings and credit capacity, as well as the perception of lenders regarding our long or short-term financial prospects. At December 31, 2009, we have unrestricted cash, cash equivalents and cash in escrow of $316,367,000 available for both current liquidity needs as well as development activities, of which $93,440,000 relates to a Development Right for which we have not begun construction.
Unrestricted cash and cash equivalents totaled $105,691,000 at December 31, 2009, an increase of $40,756,000 from $64,935,000 at December 31, 2008. The following discussion relates to changes in cash due to operating, investing and financing activities, which are presented in our Consolidated Statements of Cash Flows included elsewhere in this report.
    Operating Activities — Net cash provided by operating activities decreased to $378,600,000 in 2009 from $386,084,000 in 2008. The decrease was driven primarily by the timing of general corporate payables and the payment of interest amounts in 2009 as compared to 2008.
 
    Investing Activities — Net cash used in investing activities of $333,559,000 in 2009 related to investments in assets through development and redevelopment. In total, we invested $572,103,000 during 2009 in the following areas:
  •   We invested approximately $560,155,000 in the development of communities.
 
  •   We had capital expenditures of $11,948,000 for real estate and non-real estate assets.
    These amounts are partially offset by the proceeds from the disposition of real estate of $189,417,000.
    Financing Activities — Net cash used in financing activities totaled $4,285,000 in 2009. The net cash used is due primarily to the repayment of unsecured notes at maturity and repayment of amounts tendered of $868,564,000, the payment of cash dividends in the amount of $283,710,000, the repayment of amounts outstanding on the Credit Facility, defined below, of $124,000,000, and the repayment of secured notes of $65,229,000. These amounts were partially offset by the pooled secured financing executed in April 2009 for $741,140,000, the issuance of $500,000,000 aggregate principal amount of unsecured notes in September and $108,860,000 received from the issuance of common stock, primarily through the Continuous Equity Program (the “CEP”) we initiated in August 2009.
Variable Rate Unsecured Credit Facility
We currently have a $1,000,000,000 revolving variable rate Credit Facility with a syndicate of commercial banks that expires in November 2011 (assuming our exercise of a one-year renewal option). We pay an annual facility fee of approximately $1,250,000. The Credit Facility bears interest at varying levels based on the London Interbank Offered Rate (“LIBOR”), our credit rating and on a maturity schedule selected by us. The current stated pricing is LIBOR plus 0.40% per annum (0.63% on January 31, 2010). The spread over LIBOR can vary from LIBOR plus 0.325% to LIBOR plus 1.00% based on our credit rating. In addition, a competitive bid option is available for borrowings of up to $650,000,000. This option allows banks that are part of the lender consortium to bid to provide us loans at a rate that is lower than the stated pricing provided by the Credit Facility. The competitive bid option may result in lower pricing if market conditions allow. We had no outstanding balance under this competitive bid option at January 31, 2010. At January 31, 2010, there were no amounts outstanding on the Credit Facility,

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$45,355,000 was used to provide letters of credit, and $954,645,000 was available for borrowing under the Credit Facility. We expect to refinance the Credit Facility prior to maturity. While credit market conditions continue to improve from the difficult environment seen in 2008 and 2009, we expect facility pricing to be higher, and we may not be able to achieve the same borrowing capacity as exists under the current Credit Facility.
We are subject to financial and other covenants contained in the Credit Facility and the indenture under which our unsecured notes were issued. The financial covenants include the following:
  •   limitations on the amount of total and secured debt in relation to our overall capital structure;
 
  •   limitation on the amount of our unsecured debt relative to the undepreciated basis of real estate assets that are not encumbered by property-specific financing; and
 
  •   minimum levels of debt service coverage.
We were in compliance with these covenants at December 31, 2009.
In addition, our secured borrowings may include yield maintenance, defeasance, or prepayment penalty provisions, which would result in us incurring an additional charge in the event of a full or partial prepayment of outstanding principal before the scheduled maturity. These provisions in our secured borrowings are generally consistent with other similar types of debt instruments issued during the same time period in which our borrowings were secured.
Continuous Equity Offering Program
In August 2009, we commenced the CEP, under which we may sell up to $400,000,000 of our common stock. This program is available until the $400,000,000 is sold or August 2012, whichever occurs first. We may sell the shares in amounts and at times to be determined by us. Actual sales will depend on a variety of factors to be determined by us, including market conditions, the trading price of our common stock and determinations of the appropriate sources of funding. In conjunction with the CEP, we engaged sales agents who received compensation of 1.5% of the gross sales price for shares sold. During the three months ended December 31, 2009 we sold 37,900 shares under this program at an average sales price of $74.34 per share, for net proceeds of $2,775,000. During the year ended December 31, 2009, we sold 1,504,901 shares under this program at an average sales price of approximately $69.56 per share, resulting in net proceeds of approximately $103,109,000.
Future Financing and Capital Needs — Debt Maturities
One of our principal long-term liquidity needs is the repayment of long-term debt at the time that such debt matures. For unsecured notes, a portion of the principal of these notes may be repaid prior to maturity. Early retirement of our unsecured notes could result in gains or losses on extinguishment similar to those recognized in 2008 and 2009. If we do not have funds on hand sufficient to repay our indebtedness as it becomes due, it will be necessary for us to refinance the debt. This refinancing may be accomplished by uncollateralized private or public debt offerings, additional debt financing that is secured by mortgages on individual communities or groups of communities, draws on our Credit Facility or by equity offerings. Although we believe we will have the capacity to meet our currently anticipated liquidity needs, we cannot assure you that additional debt financing or debt or equity offerings will be available or, if available, that they will be on terms we consider satisfactory.
The following financing activity occurred during 2009:
  •   we obtained secured financing for $741,140,000 pursuant to fourteen separate ten-year mortgage loans, each secured by one of our current communities at an interest rate of 5.86%;
 
  •   we obtained $93,440,000 in variable rate tax-exempt bond financing related to a Development Right, the proceeds of which will be held in escrow until requisitioned for construction funding;
 
  •   we repaid $4,143,000 in 8.08% fixed rate debt secured by a real estate asset formerly classified as a Development Right in Alexandria, Virginia in April 2009 pursuant to its scheduled maturity;

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  •   we redeemed $37,438,000 principal amount of our $150,000,000, 7.5% unsecured notes that mature in August 2009 for par and cancelled the notes upon purchase;
 
  •   we redeemed $64,423,000 principal amount of our $200,000,000, 7.5% unsecured notes that mature in December 2010 for $63,135,000 with the discount below par recorded as a gain reflected in (gain) loss on extinguishment of debt, net on the Consolidated Statement of Operations and Other Comprehensive Income of the Consolidated Financial Statements in Item 8 of this Form 10-K and cancelled the notes upon purchase;
 
  •   we repaid $105,600,000 in unsecured debt, representing the first tranche of our $330,000,000 unsecured variable rate term loan pursuant to its scheduled maturity;
 
  •   we repaid $19,470,000 in variable rate debt secured by Avalon at Flanders Hill, located in Westborough, Massachusetts pursuant to its scheduled maturity;
 
  •   we repaid $102,562,000 of previously issued 7.5% unsecured notes, along with any unpaid interest, pursuant to their scheduled maturity;
 
  •   we repaid $112,200,000 in unsecured debt, representing the second tranche of our term loan prior to its scheduled maturity of January 2010;
 
  •   we issued a total of $500,000,000 of unsecured notes under our existing shelf registration statement. The offering consisted of two separate $250,000,000 tranches with effective interest rates of 5.80% and 6.19%, maturing in March 2017 and March 2020, respectively;
 
  •   we settled a cash tender offer, purchasing the following unsecured notes:
  •   $46,001,000 principal amount of our $200,000,000 7.5% unsecured notes due December 2010 at a weighted average price of 107.50% of par;
 
  •   $150,000,000 principal amount of our $300,000,000 6.625% unsecured notes due September 2011 at a weighted average price of 109.00% of par;
 
  •   $55,600,000 principal amount of our $250,000,000 5.5% unsecured notes due January 2012 at a weighted average price of 106.25% of par; and
 
  •   $48,399,000 principal amount of our $250,000,000 6.125% unsecured notes due November 2012 at a weighted average price of 108.75% of par;
  •   we repurchased $10,100,000 principal amount of our 6.625% unsecured notes due September 2011 at a weighted average price of 107.0% of par;
 
  •   we recorded a charge for the purchase premium as well as certain deferred issuance costs related to the $300,000,000 cash tender offer and additional $10,100,000 unsecured notes repurchase activity above of approximately $26,000,000 in (gain) loss on extinguishment of debt, net on the Consolidated Statement of Operations and Other Comprehensive Income of the Consolidated Financial Statements in Item 8 of this form 10-K;
 
  •   we repaid the final $112,200,000 of our term loan outstanding prior to its scheduled maturity of January 2011;
 
  •   we repaid $33,615,000 in variable rate debt secured by Avalon at Newton Highlands, located in Newton, Massachusetts pursuant to its scheduled maturity; and
 
  •   through the execution of interest rate swaps, we effectively converted $300,000,000 principal of our fixed rate unsecured notes, with a weighted average maturity of approximately two years, to floating rate debt at a weighted average interest rate of three month LIBOR plus 5.42%.

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The following table details debt maturities for the next five years, excluding our Credit Facility and amounts outstanding related to communities classified as held for sale, for debt outstanding at December 31, 2009 (dollars in thousands).
                                 
    All-In     Principal                      
    interest     maturity     Balance outstanding             Scheduled maturities  
Community   rate (1)     date     12-31-08     12-31-09             2010     2011     2012     2013     2014     Thereafter  
Tax-exempt bonds
                                                                                       
Fixed rate
                                                                                       
CountryBrook
    6.47 %   Mar-2012   $ 14,680     $ 13,961             $ 766     $ 816     $ 12,379     $ —     $ —     $ —  
Avalon at Symphony Glen
    5.17 %   Jul-2024     9,780       9,780               —       —       —       —       —       9,780  
Avalon at Lexington
    6.95 %   Feb-2025     11,665       11,226               466       495       526       559       594       8,586  
Avalon Campbell
    6.50 %   Jun-2025     30,914       29,881       (2 )     —       —       —       —       —       29,881  
Avalon Pacifica
    6.51 %   Jun-2025     14,023       13,554       (2 )     —       —       —       —       —       13,554  
Avalon Fields
    7.79 %   May-2027     9,988       9,714               295       316       339       364       390       8,010  
Avalon Oaks
    7.49 %   Feb-2041     16,940       16,794               157       168       180       193       207       15,889  
Avalon Oaks West
    7.54 %   Apr-2043     16,795       16,661               142       152       162       173       185       15,847  
Avalon at Chestnut Hill
    6.15 %   Oct-2047     41,834       41,501               349       368       388       409       432       39,555  
 
                                                                 
 
                    166,619       163,072               2,175       2,315       13,974       1,698       1,808       141,102  
 
                                                                                       
Variable rate (3)
                                                                                       
Avalon Burbank
    1.99 %   Oct-2010     30,142       29,387               29,387       —       —       —       —       —  
Waterford
    1.09 %   Jul-2014     33,100       33,100       (4 )     —       —       —       —       33,100       —  
Avalon at Mountain View
    1.14 %   Feb-2017     18,300       18,300       (4 )     —       —       —       —       —       18,300  
Avalon at Mission Viejo
    1.44 %   Jun-2025     7,635       7,635       (4 )     —       —       —       —       —       7,635  
Avalon at Nob Hill
    1.31 %   Jun-2025     20,800       20,800       (4 )     —       —       —       —       —       20,800  
Avalon Campbell
    2.10 %   Jun-2025     7,886       8,919       (2 )     —       —       —       —       —       8,919  
Avalon Pacifica
    2.12 %   Jun-2025     3,577       4,046       (2 )     —       —       —       —       —       4,046  
Avalon Bowery Place I
    1.35 %   Nov-2037     93,800       93,800               —       —       —       —       —       93,800  
Avalon Bowery Place II
    1.57 %   Nov-2039     48,500       48,500       (5 )     —       —       —       —       —       48,500  
Avalon Acton
    1.67 %   Jul-2040     45,000       45,000       (5 )     —       —       —       —       —       45,000  
Avalon Morningside Park
    3.00 %   Nov-2040     100,000       100,000       (5 )     —       —       —       —       —       100,000  
West Chelsea
    0.18 %   May-2012     —       93,440       (5 )     —       —       93,440       —       —       —  
Avalon Walnut Creek
    2.95 %   Mar-2046     116,000       116,000       (5 )     —       —       —       —       —       116,000  
Avalon Walnut Creek
    2.89 %   Mar-2046     10,000       10,000       (5 )     —       —       —       —       —       10,000  
 
                                                                 
 
                    534,740       628,927               29,387       —       93,440       —       33,100       473,000  
 
                                                                                       
Conventional loans (6)
                                                                                       
Fixed rate
                                                                                       
$150 million unsecured notes
    —     Aug-2009     140,000       —               —       —       —       —       —       —  
$200 million unsecured notes
    7.67 %   Dec-2010     200,000       14,576       (7 ) (12)     14,576       —       —       —       —       —  
$300 million unsecured notes
    6.79 %   Sep-2011     300,000       39,900       (8 ) (12)     —       39,900       —       —       —       —  
$50 million unsecured notes
    6.31 %   Sep-2011     50,000       —       (12 )     —       —       —       —       —       —  
$250 million unsecured notes
    5.74 %   Jan-2012     235,000       104,400       (9 ) (12)     —       —       104,400       —       —       —  
$250 million unsecured notes
    6.26 %   Nov-2012     250,000       201,601       (10 )     —       —       201,601       —       —       —  
$100 million unsecured notes
    5.11 %   Mar-2013     100,000       100,000               —       —       —       100,000       —       —  
$150 million unsecured notes
    5.52 %   Apr-2014     150,000       150,000               —       —       —       —       150,000       —  
$250 million unsecured notes
    5.89 %   Sep-2016     250,000       250,000               —       —       —       —       —       250,000  
$250 million unsecured notes
    5.82 %   Mar-2017     —       250,000               —       —       —       —       —       250,000  
$250 million unsecured notes
    6.19 %   Mar-2020     —       250,000               —       —       —       —       —       250,000  
Avalon at Twinbrook
    7.25 %   Oct-2011     7,801       7,578               239       7,339       —       —       —       —  
Avalon at Tysons West
    5.55 %   Jul-2028     6,218       6,045               183       193       204       216       229       5,020  
4600 Eisenhower Avenue
    —     Apr-2009     4,175       —               —       —       —       —       —       —  
Avalon Orchards
    7.77 %   Jul-2033     19,322       19,011               333       357       382       409       438       17,092  
Avalon at Arlington Square
    4.81 %   Apr-2013     170,125       170,125               —       —       —       170,125       —       —  
Avalon at Cameron Court
    5.07 %   Apr-2013     94,572       94,572               —       —       —       94,572       —       —  
Avalon Crescent
    5.59 %   May-2015     110,600       110,600               —       —       —       —       —       110,600  
Avalon Silicon Valley
    5.74 %   Jul-2015     150,000       150,000               —       —       —       —       —       150,000  
Avalon Darien
    6.22 %   Nov-2015     51,749       51,172               660       702       746       793       843       47,428  
Avalon Greyrock Place
    6.13 %   Nov-2015     62,400       61,690               811       861       914       971       1,031       57,102  
Avalon Commons
    6.09 %   Jan-2019     55,100       55,100               —       693       734       779       826       52,068  
Avalon Walnut Creek
    4.00 %   Jul-2066     2,500       2,500               —       —       —       —       —       2,500  
Avalon Shrewsbury
    5.92 %   May-2019     —       21,130               —       183       285       301       319       20,042  
Avalon Gates
    5.93 %   May-2019     —       41,321               —       357       557       589       624       39,194  
Avalon at Stamford Harbor
    5.92 %   May-2019     —       65,695               —       568       885       937       992       62,313  
Avalon Freehold
    5.94 %   May-2019     —       36,630               —       317       493       522       553       34,745  
Avalon Run East II
    5.94 %   May-2019     —       39,250               —       339       529       560       592       37,230  
Avalon Gardens
    6.06 %   May-2019     —       66,237               —       572       892       945       1,000       62,828  
Avalon Edgewater
    6.10 %   May-2019     —       78,565               —       679       1,058       1,120       1,186       74,522  
Avalon Foxhall
    6.05 %   May-2019     —       59,010               —       510       795       841       891       55,973  
Avalon Gallery Place I
    6.05 %   May-2019     —       45,850               —       396       618       654       692       43,490  
Avalon Traville
    5.91 %   May-2019     —       77,700               —       672       1,047       1,108       1,173       73,700  
Avalon Bellevue
    5.91 %   May-2019     —       26,698               —       231       360       381       403       25,323  
Avalon on the Alameda
    5.91 %   May-2019     —       53,980               —       467       727       770       815       51,201  
Avalon Mission Bay North
    5.90 %   May-2019     —       73,269               —       633       987       1,045       1,106       69,498  
Avalon Woburn
    5.91 %   May-2019     —       55,805               —       482       752       796       842       52,933  
 
                                                                 
 
                    2,409,562       2,830,010               16,802       56,451       318,966       378,434       164,555       1,894,802  
 
                                                                                       
Variable rate (3)
                                                                                       
Avalon at Flanders Hill
    —     May-2009     19,735       —               —       —       —       —       —       —  
Avalon at Newton Highlands
    —     Dec-2009     34,945       —               —       —       —       —       —       —  
Avalon at Crane Brook
    2.11 %   Mar-2011     31,530       30,440       (4 )     1,169       29,271       —       —       —       —  
Avalon at Bedford Center
    1.74 %   May-2012     16,361       15,871       (4 )     527       560       14,784       —       —       —  
Avalon Walnut Creek
    3.03 %   Mar-2046     9,000       9,000       (5 )     —       —       —       —       —       9,000  
$105.6 million unsecured notes
    —     May-2009     105,600       —               —       —       —       —       —       —  
$112.2 million unsecured notes
    —     Jan-2010     112,200       —       (11 )     —       —       —       —       —       —  
$112.2 million unsecured notes
    —     Jan-2011     112,200       —       (11 )     —       —       —       —       —       —  
$200 Million unsecured notes
    7.034 %   Dec-2010     —       75,000       (12 )     75,000       —       —       —       —       —  
$300 Million unsecured notes
    5.663 %   Sep-2011     —       100,000       (12 )     —       100,000       —       —       —       —  
$50 Million unsecured notes
    5.663 %   Sep-2011     —       50,000       (12 )     —       50,000       —       —       —       —  
$250 Million unsecured notes
    4.352 %   Jan-2012     —       75,000       (12 )     —       —       75,000       —       —       —  
 
                                                                 
 
                    441,571       355,311               76,696       179,831       89,784       —       —       9,000  
 
                                                                                       
Total indebtedness — excluding unsecured credit facility   $ 3,552,492     $ 3,977,320             $ 125,060     $ 238,597     $ 516,164     $ 380,132     $ 199,463     $ 2,517,904  
 
                                                                 
 
(1)   Includes credit enhancement fees, facility fees, trustees’ fees and other fees.

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(2)   Financed by variable rate, tax-exempt debt, but the interest rate on a portion of this debt is effectively fixed at December 31, 2009 and December 31, 2008 through an interest rate swap agreement. The portion of the debt fixed through the interest rate swap agreement decreases (and therefore the variable portion of the debt increases) monthly as payments are made to a principal reserve fund.
 
(3)   Variable rates are given as of December 31, 2009.
 
(4)   Financed by variable rate debt, but interest rate is capped through an interest rate protection agreement.
 
(5)   Represents full amount of the debt as of December 31, 2009. Actual amounts drawn on the debt as of December 31, 2009 are $46,216 for Bowery Place II, $44,678 for Avalon Acton, $88,823 for Morningside Park, $64,080 for Walnut Creek, and $0 for West Chelsea.
 
(6)   Balances outstanding represent total amounts due at maturity, and are not net of $2,448 of debt discount and basis adjustments associated with the hedged unsecured notes as of December 31, 2009 and $2,035 of debt discount as of December 31, 2008, as reflected in unsecured notes on our Consolidated Balance Sheets included elsewhere in this report.
 
(7)   In October 2009, we redeemed $46,001 principal amount of our $200,000 7.5% unsecured notes due December 2010.
 
(8)   In October 2009, we redeemed $160,100 principal amount of our $300,000 6.625% unsecured notes due September 2011.
 
(9)   In October 2009, we redeemed $55,600 principal amount of our $250,000 5.5% unsecured notes due January 2012.
 
(10)   In October 2009, we redeemed $48,399 principal amount of our $250,000 6.125% unsecured notes due November 2012.
 
(11)   In August and October 2009, we repaid $224,400 in unsecured debt, representing the second and third tranches of our term loan, prior to its scheduled maturities in January 2010 and 2011, respectively.
 
(12)   In October 2009, we executed $300,000 of interest rate swaps allowing us to effectively convert $300,000 principal of our fixed rate unsecured notes to floating rate debt.
Future Financing and Capital Needs — Portfolio and Other Activity
As of December 31, 2009, we had seven new wholly owned communities under construction, for which a total estimated cost of $245,046,000 remained to be invested. We also had seven wholly owned communities under reconstruction, for which a total estimated cost of $49,527,000 remained to be invested. In addition, we may be required to contribute our proportionate share of capital to Fund II, if or to the extent that Fund II makes capital calls in conjunction with additional community acquisitions during 2010. Substantially all of the capital expenditures necessary to complete the communities currently under construction and reconstruction, development costs related to pursuing Development Rights, as well as for equity contributions to Fund II, will be funded from:
  •   cash currently on hand, including cash in construction escrows, invested in highly liquid overnight money market funds and repurchase agreements, and short-term investment vehicles;
 
  •   the remaining capacity under our $1,000,000,000 Credit Facility;
 
  •   retained operating cash;
 
  •   the net proceeds from sales of existing communities;
 
  •   the issuance of debt or equity securities; and/or
 
  •   private equity funding, including joint venture activity.
Before planned reconstruction activity, including reconstruction activity related to communities acquired by the Funds, or the construction of a Development Right begins, we intend to arrange adequate financing to complete these undertakings, although we cannot assure you that we will be able to obtain such financing. In the event that financing cannot be obtained, we may have to abandon Development Rights, write off associated pre-development costs that were capitalized and/or forego reconstruction activity. In such instances, we will not realize the increased revenues and earnings that we expected from such Development Rights or reconstruction activity and significant losses could be incurred.
From time to time we use joint ventures to hold or develop individual real estate assets. We generally employ joint ventures primarily to mitigate asset concentration or market risk and secondarily as a source of liquidity. We may also use joint ventures related to mixed-use land development opportunities where our partners bring development and operational expertise to the venture. Each joint venture or partnership agreement has been individually negotiated, and our ability to operate and/or dispose of a community in our sole discretion may be limited to varying

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degrees depending on the terms of the joint venture or partnership agreement. We cannot assure you that we will achieve our objectives through joint ventures.
In evaluating our allocation of capital within our markets, we sell assets that do not meet our long-term investment criteria or when capital and real estate markets allow us to realize a portion of the value created over the past business cycle and redeploy the proceeds from those sales to develop and redevelop communities. Because the proceeds from the sale of communities may not be immediately redeployed into revenue generating assets, the immediate effect of a sale of a community for a gain is to increase net income, but reduce future total revenues, total expenses and NOI. However, we believe that the absence of future cash flows from communities sold will have a minimal impact on our ability to fund future liquidity and capital resource needs.
Off-Balance Sheet Arrangements
In addition to our investment interests in consolidated and unconsolidated real estate entities, we have certain off-balance sheet arrangements with the entities in which we invest. Additional discussion of these entities can be found in Note 6, “Investments in Real Estate Entities,” of our Consolidated Financial Statements located elsewhere in this report.
  •   CVP I, LLC has outstanding tax-exempt, variable rate bonds maturing in November 2036 in the amount of $117,000,000, which have permanent credit enhancement. We have agreed to guarantee, under limited circumstances, the repayment to the credit enhancer of any advances it may make in fulfillment of CVP I, LLC’s repayment obligations under the bonds. We have also guaranteed to the credit enhancer that CVP I, LLC will obtain a final certificate of occupancy for the project (Chrystie Place in New York City), which is expected in 2010. Our 80% partner in this venture has agreed that it will reimburse us its pro rata share of any amounts paid relative to these guaranteed obligations. The estimated fair value of and our obligation under these guarantees, both at inception and as of December 31, 2009, were not significant. As a result we have not recorded any obligation associated with these guarantees at December 31, 2009.
 
  •   Subsidiaries of Fund I have 21 loans secured by individual assets with amounts outstanding in the aggregate of $436,410,000, with varying maturity dates (or dates after which the loans can be prepaid), ranging from October 2011 to September 2016. These mortgage loans are secured by the underlying real estate. The mortgage loans are payable by the subsidiaries of Fund I with operating cash flow or disposition proceeds from the underlying real estate. We have not guaranteed the debt of Fund I, nor do we have any obligation to fund this debt should Fund I be unable to do so.
 
      In addition, as part of the formation of Fund I, we have provided to one of the limited partners a guarantee. The guarantee provides that if, upon final liquidation of Fund I, the total amount of all distributions to that partner during the life of Fund I (whether from operating cash flow or property sales) does not equal a minimum of the total capital contributions made by that partner, then we will pay the partner an amount equal to the shortfall, but in no event more than 10% of the total capital contributions made by the partner (maximum of approximately $7,500,000 as of December 31, 2009). As of December 31, 2009, the expected realizable value of the real estate assets owned by Fund I is considered adequate to cover such potential payment to that partner under the expected Fund I liquidation scenario. The estimated fair value of, and our obligation under this guarantee, both at inception and as of December 31, 2009 was not significant and therefore we have not recorded any obligation for this guarantee as of December 31, 2009.
 
  •   A subsidiary of Fund II has one loan secured by an asset in the amount of $21,515,000 with a maturity of June 2019. This loan is payable by the subsidiary of Fund II. As of December 31, 2009, Fund II also has $30,200,000 outstanding under a credit facility that matures in December 2010. The mortgage loan is payable by the subsidiary of Fund II with operating cash flow or disposition proceeds from the underlying real estate, and the credit facility is payable by Fund II and is secured by capital commitments. We have not guaranteed, beyond our proportionate share of capital commitments supporting the credit facility of Fund II, the debt of Fund II, nor do we have any obligation to fund this debt should Fund II be unable to do so.

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      In addition, as part of the formation of Fund II, we have provided to one of the limited partners a guarantee. The guarantee provides that if, upon final liquidation of Fund II, the total amount of all distributions to that partner during the life of Fund II (whether from operating cash flow or property sales) does not equal a minimum of the total capital contributions made by that partner, then we will pay the partner an amount equal to the shortfall, but in no event more than 10% of the total capital contributions made by the partner (maximum of approximately $1,470,000 as of December 31, 2009). As of December 31, 2009, the expected realizable value of the real estate assets owned by Fund II is considered adequate to cover such potential payment to that partner under the expected Fund II liquidation scenario. The estimated fair value of, and our obligation under this guarantee, both at inception and as of December 31, 2009 was not significant and therefore we have not recorded any obligation for this guarantee as of December 31, 2009.
 
  •   MVP I, LLC, the entity that owns Avalon at Mission Bay North II, has a loan secured by the underlying real estate assets of the community for $105,000,000. The loan is a fixed rate, interest-only note bearing interest at 6.02%, maturing in December 2015. We have not guaranteed the debt of MVP I, LLC, nor do we have any obligation to fund this debt should MVP I, LLC be unable to do so.
 
  •   Avalon Del Rey Apartments, LLC has a loan secured by the underlying real estate assets of the community for $45,943,000 maturing in April 2016. The variable rate loan had an interest rate of 3.69% at December 31, 2009. We have not guaranteed the debt of Avalon Del Rey Apartments, LLC, nor do we have any obligation to fund this debt should Avalon Del Rey Apartments, LLC be unable to do so.
 
  •   Aria at Hathorne Hill, LLC is a joint venture in which we have a non-managing member interest. The LLC is developing for-sale town homes in Danvers, Massachusetts. The LLC has three separate variable rate loans with aggregate borrowings of $2,432,000 and a weighted average interest rate of 4.19% at December 31, 2009. We have not guaranteed the debt of Aria at Hathorne, nor do we have any obligation to fund this debt should Aria at Hathorne be unable to do so.
 
  •   PHVP I, LLC, a consolidated joint venture in which we hold a 99.0% controlling interest, constructed a public garage adjacent to our Walnut Creek development. As part of the construction management services we provided to PHVP I, LLC for the construction of the public garage, we provided a construction completion guarantee to the related lender in order to fulfill their standard financing requirements related to the garage construction financing, which occurred in the third quarter of 2009. Our obligations under this guarantee therefore, have terminated and we have no further obligation under this agreement.
 
  •   In 2007 we entered into a non-cancelable commitment (the “Commitment”) to acquire parcels of land in Brooklyn, New York for an aggregate purchase price of approximately $111,000,000. Under the terms of the Commitment, we are closing on the various parcels over a period determined by the seller’s ability to execute unrelated purchase transactions and achieve deferral of gains for the land sold under this Commitment. However, under no circumstances will the Commitment extend beyond 2011, at which time either we or the seller can compel execution of the remaining transactions. At December 31, 2009, we have an outstanding commitment to purchase the remaining land for approximately $51,500,000.
There are no other lines of credit, side agreements, financial guarantees or any other derivative financial instruments related to or between our unconsolidated real estate entities and us. In evaluating our capital structure and overall leverage, management takes into consideration our proportionate share of this unconsolidated debt.
Contractual Obligations
In 2009, we entered into a lease agreement for office space in Arlington, Virginia. The office space will serve as our corporate headquarters, with relocation scheduled to occur in the first half of 2010. The lease has a ten year lease term, with extension rights, with rent of approximately $1,900,000 annually. We are marketing for lease or sale the building that serves as our current headquarters in Alexandria, Virginia. Aside from this lease, there have not been any other material changes outside of the ordinary course of business to our contractual obligations during 2009.

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Scheduled contractual obligations required for the next five years and thereafter are as follows as of December 31, 2009 (dollars in thousands):
                                         
    Payments due by period  
    Total     Less than 1 Year     1-3 Years     3-5 Years     More than 5 Years  
Debt Obligations
  $ 3,977,320     $ 125,060     $ 754,761     $ 579,595     $ 2,517,904  
 
                                       
Operating Lease Obligations (1)
    3,412,947       20,732       50,815       53,850       3,287,550  
 
                             
Total
  $ 7,390,267     $ 145,792     $ 805,576     $ 633,445     $ 5,805,454  
 
                             
 
(1)   Includes land leases expiring between October 2026 and March 2142. Amounts do not include any adjustment for purchase options available under the land leases.
Inflation and Deflation
Substantially all of our apartment leases are for a term of one year or less. In an inflationary environment, this may allow us to realize increased rents upon renewal of existing leases or the beginning of new leases. Short-term leases generally minimize our risk from the adverse effects of inflation, although these leases generally permit residents to leave at the end of the lease term and therefore expose us to the effect of a decline in market rents. In a deflationary rent environment, we may be exposed to declining rents more quickly under these shorter-term leases.
Forward-Looking Statements
This Form 10-K contains “forward-looking statements” as that term is defined under the Private Securities Litigation Reform Act of 1995. You can identify forward-looking statements by our use of the words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “assume,” “project,” “plan,” “may,” “shall,” “will” and other similar expressions in this Form 10-K, that predict or indicate future events and trends and that do not report historical matters. These statements include, among other things, statements regarding our intent, belief or expectations with respect to:
  •   our potential development, redevelopment, acquisition or disposition of communities;
 
  •   the timing and cost of completion of apartment communities under construction, reconstruction, development or redevelopment;
 
  •   the timing of lease-up, occupancy and stabilization of apartment communities;
 
  •   the pursuit of land on which we are considering future development;
 
  •   the anticipated operating performance of our communities;
 
  •   cost, yield, revenue, NOI and earnings estimates;
 
  •   our declaration or payment of distributions;
 
  •   our joint venture and discretionary fund activities;
 
  •   our policies regarding investments, indebtedness, acquisitions, dispositions, financings and other matters;
 
  •   our qualification as a REIT under the Internal Revenue Code;
 
  •   the real estate markets in Northern and Southern California and markets in selected states in the Mid-Atlantic, Midwest, New England, Metro New York/New Jersey and Pacific Northwest regions of the United States and in general;
 
  •   the availability of debt and equity financing;
 
  •   interest rates;
 
  •   general economic conditions including the recent economic downturn; and
 
  •   trends affecting our financial condition or results of operations.
We cannot assure the future results or outcome of the matters described in these statements; rather, these statements merely reflect our current expectations of the approximate outcomes of the matters discussed. In addition, these

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forward-looking statements represent our estimates and assumptions only as of the date of this report. We do not undertake a duty to update these forward-looking statements, and therefore they may not represent our estimates and assumptions after the date of this report. You should not rely on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, some of which are beyond our control. These risks, uncertainties and other factors may cause our actual results, performance or achievements to differ materially from the anticipated future results, performance or achievements expressed or implied by these forward-looking statements. In addition to the factors referred to below, you should carefully review the discussion under Item 1a., “Risk Factors,” in this document for a discussion of additional risks associated with our business and these forward-looking statements.
Some of the factors that could cause our actual results, performance or achievements to differ materially from those expressed or implied by these forward-looking statements include, but are not limited to, the following:
  •   we may fail to secure development opportunities due to an inability to reach agreements with third parties to obtain land at attractive prices or to obtain desired zoning and other local approvals;
 
  •   we may abandon or defer development opportunities for a number of reasons, including changes in local market conditions which make development less desirable, increases in costs of development, increases in the cost of capital or lack of capital availability, resulting in losses;
 
  •   construction costs of a community may exceed our original estimates;
 
  •   we may not complete construction and lease-up of communities under development or redevelopment on schedule, resulting in increased interest costs and construction costs and a decrease in our expected rental revenues;
 
  •   occupancy rates and market rents may be adversely affected by competition and local economic and market conditions which are beyond our control;
 
  •   financing may not be available on favorable terms or at all, and our cash flows from operations and access to cost effective capital may be insufficient for the development of our pipeline which could limit our pursuit of opportunities;
 
  •   our cash flows may be insufficient to meet required payments of principal and interest, and we may be unable to refinance existing indebtedness or the terms of such refinancing may not be as favorable as the terms of existing indebtedness;
 
  •   we may be unsuccessful in our management of Fund I, Fund II or the REIT vehicles that are used with each respective Fund; and
 
  •   we may be unsuccessful in managing changes in our portfolio composition.
Critical Accounting Policies
The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, or different assumptions were made, it is possible that different accounting policies would have been applied, resulting in different financial results or a different presentation of our financial statements. Below is a discussion of the accounting policies that we consider critical to an understanding of our financial condition and operating results that may require complex or significant judgment in their application or require estimates about matters which are inherently uncertain. A discussion of our significant accounting policies, including further discussion of the accounting policies described below, can be found in Note 1, “Organization and Basis of Presentation” of our Consolidated Financial Statements.
Principles of Consolidation
We may enter into various joint venture agreements with unrelated third parties to hold or develop real estate assets. We must determine for each of these ventures whether to consolidate the entity or account for our investment under the equity or cost basis of accounting.
We determine whether to consolidate certain entities based on our rights and obligations under the joint venture agreements, applying the applicable accounting guidance. For investment interests that we do not consolidate, we

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evaluate the guidance to determine the accounting framework to apply. The application of the rules in evaluating the accounting treatment for each joint venture is complex and requires substantial management judgment. Therefore, we believe the decision to choose an appropriate accounting framework is a critical accounting estimate.
If we were to consolidate the joint ventures that we accounted for using the equity method at December 31, 2009, our assets would have increased by $1,030,260,000 and our liabilities would have increased by $778,156,000. We would be required to consolidate those joint ventures currently not consolidated for financial reporting purposes if the facts and circumstances changed, including but not limited to the following reasons, none of which are currently expected to occur:
  •   For entities not considered to be variable interest entities, the nature of the entity changed such that it would be considered a variable interest entity and if we were considered the primary beneficiary.
 
  •   For entities in which we do not hold a controlling voting and/or variable interest, the contractual arrangement changed resulting in our investment interest being either a controlling voting and/or variable interest.
We evaluate our accounting for investments on a quarterly basis or when a significant change in the design of an entity occurs.
Cost Capitalization
We capitalize costs during the development of assets beginning when we determine that development of a future asset is probable until the asset, or a portion of the asset, is delivered and is ready for its intended use. For redevelopment efforts, we capitalize costs either (i) in advance of taking homes out of service when significant renovation of the common area has begun until the redevelopment is completed, or (ii) when an apartment home is taken out of service for redevelopment until the redevelopment is completed and the apartment home is available for a new resident. Rental income and operating expenses incurred during the initial lease-up or post-redevelopment lease-up period are fully recognized as they accrue.
During the development and redevelopment efforts we capitalize all direct costs and indirect costs which have been incurred as a result of the development and redevelopment activities. These costs include interest and related loan fees, property taxes as well as other direct and indirect costs. Interest is capitalized for any project specific financing, as well as for general corporate financing to the extent of our aggregate investment in the projects. Indirect project costs, which include personnel and office and administrative costs that are clearly associated with our development and redevelopment efforts, are also capitalized. The estimation of the direct and indirect costs to capitalize as part of our development and redevelopment activities requires judgment and, as such, we believe cost capitalization to be a critical accounting estimate.
There may be a change in our operating expenses in the event that there are changes in accounting guidance governing capitalization or changes to our levels of development or redevelopment activity. If changes in the accounting guidance limit our ability to capitalize costs or if we reduce our development and redevelopment activities without a corresponding decrease in indirect project costs, there may be an increase in our operating expenses. For example, if in 2009 our development activities decreased by 10%, and there were no corresponding decrease in our indirect project costs, our operating expenses would have increased by $2,493,200.
We capitalize pre-development costs incurred in pursuit of Development Rights. These costs include legal fees, design fees and related overhead costs. Future development of these pursuits is dependent upon various factors, including zoning and regulatory approval, rental market conditions, construction costs and availability of capital. Pre-development costs incurred for pursuits for which future development is not yet considered probable are expensed as incurred. In addition, if the status of a Development Right changes, making future development no longer probable, any capitalized pre-development costs are written off with a charge to expense.
Due to the subjectivity in determining whether a pursuit will result in the development of an apartment community, and therefore should be capitalized, the accounting for pursuit costs is a critical accounting estimate. If we had

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determined that 10% of our capitalized pursuit costs were associated with Development Rights that were no longer probable of occurring, net income for the year ended December 31, 2009 would have decreased by $8,776,300.
Abandoned Pursuit Costs & Asset Impairment
We capitalize pre-development costs incurred in pursuit of new development opportunities for which we currently believe future development is probable. Future development of these Development Rights is dependent upon various factors, including zoning and regulatory approval, rental market conditions, construction costs and the availability of capital. Pre-development costs incurred for pursuits for which future development is not yet considered probable are expensed as incurred. In addition, if the status of a Development Right changes, making future development by us no longer probable, any capitalized pre-development costs are written off with a charge to expense. We expensed costs related to abandoned pursuits, which includes the abandonment of Development Rights and disposition pursuits, in the amounts of $5,842,000 in 2009 and $12,511,000 in 2008. These costs are included in operating expenses, excluding property taxes on the accompanying Consolidated Statements of Operations and Other Comprehensive Income. Abandoned pursuit costs can vary greatly, and the costs incurred in any given period may be significantly different in future years.
During 2009, we concluded that the continued economic downturn and the related decline in employment levels did not support the development and construction of certain new apartment communities that were previously in planning. This resulted in the recognition of an impairment charge of $20,302,000 related to the impairment of two land parcels which we currently do not intend to develop. We looked to third-party pricing estimates to determine the fair values of the land parcels considered to be impaired. Given the heterogeneous nature of multifamily real estate, the third party values incorporated significant other unobservable inputs and are therefore considered to be Level 3 prices in the fair value hierarchy. In addition, in 2009 we recognized a further impairment charge of $850,000 on a land parcel for which an earlier impairment had been recognized in the fourth quarter of 2008. The additional impairment charge reduces our carrying basis to its current estimated selling price less costs to dispose.
Our focus on value creation through real estate development presents an impairment risk in the event of a future deterioration of the real estate and/or capital markets or a decision by us to reduce or cease development. We cannot predict the occurrence of future events that may cause an impairment assessment to be performed, or the likelihood of any future impairment charges, if any. You should also review Item 1a., “Risk Factors” of this Form 10-K.
REIT Status
We are a Maryland corporation that has elected to be treated, for federal income tax purposes, as a REIT. We elected to be taxed as a REIT under the Code for the year ended December 31, 1994 and have not revoked such election. A corporate REIT is a legal entity which holds real estate interests and must meet a number of organizational and operational requirements, including a requirement that it currently distribute at least 90% of its adjusted taxable income to stockholders. As a REIT, we generally will not be subject to corporate level federal income tax on taxable income if we distribute 100% of taxable income to our stockholders over time periods allowed under the Code. If we fail to qualify as a REIT in any taxable year, we will be subject to federal and state income taxes at regular corporate rates (subject to any applicable alternative minimum tax) and may not be able to elect to qualify as a REIT for four subsequent taxable years. For example, if we failed to qualify as a REIT in 2009, our net income would have decreased by approximately $62,000,000.
Our qualification as a REIT requires management to exercise significant judgment and consideration with respect to operational matters and accounting treatment. Therefore, we believe our REIT status is a critical accounting estimate.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks from our financial instruments primarily from changes in market interest rates. We do not have exposure to any other significant market risk. We monitor interest rate risk as an integral part of our overall risk management, which recognizes the unpredictability of financial markets and seek to reduce the

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potentially adverse effect on our results of operations. Our operating results are affected by changes in interest rates, primarily, in short-term LIBOR and the SIFMA index as a result of borrowings under our Credit Facility and outstanding bonds with variable interest rates. In addition the fair value of our fixed rate unsecured and secured notes are impacted by changes in market interest rates. The effect of interest rate fluctuations on our results of operations historically has been small relative to other factors affecting operating results, such as rental rates and occupancy.
We currently use interest rate protection agreements (consisting of interest rate swap and interest rate cap agreements) for our risk management objectives, as well as for compliance with the requirements of certain lenders, and not for trading or speculative purposes. In the fourth quarter of 2009, we entered into interest rate swap agreements to convert fixed rate borrowings to effective floating rate notes. In addition, we have interest rate caps and interest rate swaps that serve to either convert floating rate borrowings to fixed rate borrowings, or effectively limit the amount of interest rate expense we would incur on a floating rate borrowing. Further discussion of the financial instruments impacted and our exposure is presented below.
We had $1,271,273,000 and $1,088,848,000 in variable rate debt outstanding (excluding variable rate debt effectively fixed through swap agreements and including fixed rate debt effectively swapped to variable rates through swap agreements) as of December 31, 2009 and 2008, respectively. If interest rates on the variable rate debt had been 100 basis points higher throughout 2009 and 2008, our annual interest costs would have increased by approximately $9,079,000 and $11,490,000, respectively, based on balances outstanding during the applicable years.
As of December 31, 2009, we had executed interest rate swap agreements to hedge cash flow variability for approximately $43,435,000 of our variable rate, tax-exempt debt and executed interest rate swap agreements to hedge fair value exposure for approximately $300,000,000 of our fixed rate unsecured notes. Had these interest rate swap agreements not been in place during 2009 and 2008, our annual interest costs would have been approximately $1,492,000 higher and $1,451,000 lower, respectively, based on balances outstanding and reported interest rates during the applicable years. Additionally, if the variable interest rates on hedged floating rate debt had been 100 basis points higher throughout 2009 and 2008 and these swap agreements had not been in place, our annual interest costs would have been approximately $2,054,000 higher and $887,000 lower, respectively.
Because the counterparties providing the interest rate cap and swap agreements are major financial institutions which have an A+ or better credit rating by the Standard & Poor’s Ratings Group and the current valuation of the position is a net liability for us, we do not believe there is exposure at this time to a default by a counterparty provider.
In addition, changes in interest rates affect the fair value of our fixed rate debt, computed using a discounted cash flow model considering our current market yields, which impacts the fair value of our aggregate indebtedness. Debt securities and notes payable (excluding amounts outstanding under our Credit Facility) with an aggregate carrying value of $3,977,320,000 at December 31, 2009 had an estimated aggregate fair value of $4,052,817,000 at December 31, 2009. Contractual fixed rate debt represented $3,249,647,000 of the carrying value and $3,352,312,000 of the fair value at December 31, 2009. If interest rates had been 100 basis points higher as of December 31, 2009, the fair value of this fixed rate debt would have decreased by $159,030,000.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item 8 is included as a separate section of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9a. CONTROLS AND PROCEDURES
  (a)   Evaluation of Disclosure Controls and Procedures. As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of the end of the period covered by this report, the Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. We continue to review and document our disclosure controls and procedures, including our internal control over financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.
 
  (b)   Management’s Report on Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2009 based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2009.
Our internal control over financial reporting as of December 31, 2009 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included elsewhere herein.
  (c)   Changes in Internal Control Over Financial Reporting. There was no change in our internal control over financial reporting that occurred during the fourth quarter of the period covered by this Annual Report on Form 10-K that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9b. OTHER INFORMATION
None.

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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 pertaining to directors and executive officers of the Company and the Company’s Code of Conduct is incorporated herein by reference to the Company’s Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the end of the year covered by this Form 10-K with respect to the Annual Meeting of Stockholders scheduled to be held on May 19, 2010.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 pertaining to executive compensation is incorporated herein by reference to the Company’s Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the end of the year covered by this Form 10-K with respect to the Annual Meeting of Stockholders scheduled to be held on May 19, 2010.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by Item 12 pertaining to security ownership of management and certain beneficial owners of the Company’s common stock is incorporated herein by reference to the Company’s Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the end of the year covered by this Form 10-K with respect to the Annual Meeting of Stockholders scheduled to be held on May 19, 2010, to the extent not set forth below.
The Company maintains the 2009 Stock Option and Incentive Plan (the “2009 Plan”) and the 1996 Non-Qualified Employee Stock Purchase Plan (the “ESPP”), pursuant to which common stock or other equity awards may be issued or granted to eligible persons.
The following table gives information about equity awards under the 2009 Plan, the Company’s prior 1994 Stock Incentive Plan (the “1994 Plan”) under which awards were previously made, and the ESPP as of December 31, 2009:
                         
            (b)     (c)  
            Weighted-     Number of securities  
    (a)     average     remaining available for  
    Number of securities     exercise price     future issuance under  
    to be issued upon     of outstanding     equity compensation  
    exercise of     options,     plans (excluding  
    outstanding options,     warrants and     securities reflected in  
Plan category   warrants and rights     rights     column (a))  
Equity compensation plans approved by security holders (1)
    2,964,394 (2)   $ 80.76 (3)     4,164,064  
 
                       
Equity compensation plans not approved by security holders (4)
    —       n/a       755,484  
 
                 
Total
    2,964,394     $ 80.76 (3)     4,919,548  
 
                 
 
(1)   Consists of the 2009 Plan and the 1994 Plan.
 
(2)   Includes 128,141 deferred units granted under the 2009 Plan and the 1994 Plan, which, subject to vesting requirements, will convert in the future to common stock on a one-for-one basis, but does not include 244,640 shares of restricted stock that are outstanding and that are already reflected in the Company’s outstanding shares.

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(3)   Excludes deferred units granted under the 2009 Plan and the 1994 Plan, which, subject to vesting requirements, will convert in the future to common stock on a one-for-one basis.
 
(4)   Consists of the ESPP.
The ESPP, which was adopted by the Board of Directors on October 29, 1996, has not been approved by our shareholders. A further description of the ESPP appears in Note 10, “Stock-Based Compensation Plans,” of our Consolidated Financial Statements included in this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 pertaining to certain relationships and related transactions is incorporated herein by reference to the Company’s Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the end of the year covered by this Form 10-K with respect to the Annual Meeting of Stockholders to be held on May 19, 2010.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 pertaining to the fees paid to and services provided by the Company’s principal accountant is incorporated herein by reference to the Company’s Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the end of the year covered by this Form 10-K with respect to the Annual Meeting of Stockholders to be held on May 19, 2010.

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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE
15(a)(1) Financial Statements
Index to Financial Statements
Consolidated Financial Statements and Financial Statement Schedule:
     
  F-1
 
   
  F-3
 
   
  F-4
 
   
  F-5
 
   
  F-6
 
   
  F-8
15(a)(2) Financial Statement Schedule
     
  F-37
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
15(a)(3) Exhibits
The exhibits listed on the accompanying Index to Exhibits are filed as a part of this report.

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INDEX TO EXHIBITS
         
3(i).1
  —   Articles of Amendment and Restatement of Articles of Incorporation of the Company, dated as of June 4, 1998. (Incorporated by reference to Exhibit 3(i).1 to Form 10-K of the Company filed March 1, 2007.)
 
       
3(i).2
  —   Articles of Amendment, dated as of October 2, 1998. (Incorporated by reference to Exhibit 3(i).2 to Form 10-K of the Company filed March 1, 2007.)
 
       
3(ii).1