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, 2008
Commission file number 1-12672
AVALONBAY COMMUNITIES, INC.
(Exact name of registrant as specified in its charter)
 
     
Maryland   77-0404318
(State or other jurisdiction of   (I.R.S. Employer Identification No.)
incorporation or organization)    
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       Noo
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
(Do not check if a smaller reporting company)
  Smaller reporting company o 
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, 2008 was $6,818,282,578.
The number of shares of the registrant’s Common Stock, par value $.01 per share, outstanding as of January 31, 2009 was 79,745,531.
Documents Incorporated by Reference
Portions of AvalonBay Communities, Inc.’s Proxy Statement for the 2009 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
             
        PAGE
 
  PART I        
ITEM 1.
  BUSINESS     1  
 
           
ITEM 1a.
  RISK FACTORS     8  
 
           
ITEM 1b.
  UNRESOLVED STAFF COMMENTS     17  
 
           
ITEM 2.
  COMMUNITIES     17  
 
           
ITEM 3.
  LEGAL PROCEEDINGS     33  
 
           
ITEM 4.
  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS     34  
 
           
 
  PART II        
 
           
ITEM 5.
  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES     35  
 
           
ITEM 6.
  SELECTED FINANCIAL DATA     37  
 
           
ITEM 7.
  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS     40  
 
           
ITEM 7a.
  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
    61  
 
           
ITEM 8.
  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA     63  
 
           
ITEM 9.
  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE     63  
 
           
ITEM 9a.
  CONTROLS AND PROCEDURES     63  
 
           
ITEM 9b.
  OTHER INFORMATION     63  
 
           
 
  PART III        
 
           
ITEM 10.
  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE     64  
 
           
ITEM 11.
  EXECUTIVE COMPENSATION     64  
 
           
ITEM 12.
  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS     64  
 
           
ITEM 13.
  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE     65  
 
           
ITEM 14.
  PRINCIPAL ACCOUNTING FEES AND SERVICES     65  
 
           
 
  PART IV        
 
           
ITEM 15.
  EXHIBITS, FINANCIAL STATEMENT SCHEDULE     66  
 
           
SIGNATURES
        72  

 


 

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, or 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 Mid-Atlantic, 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 larger increases in cash flows relative to other markets.
At January 31, 2009, we owned or held a direct or indirect ownership interest in:
  •   164 operating apartment communities containing 45,728 apartment homes in ten states and the District of Columbia, of which (i) seven wholly owned communities containing 2,143 apartment homes were under redevelopment, as discussed below and (ii) 19 communities containing 3,829 apartment homes, of which two communities containing 467 apartment homes were under redevelopment, were held by the Fund (as defined below), which we manage and in which we own a 15.2% equity interest;
 
  •   14 communities under construction that are expected to contain an aggregate of 4,564 apartment homes when completed; and
 
  •   rights to develop an additional 27 communities that, if developed in the manner expected, will contain an estimated 7,304 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 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 are consolidated for financial reporting purposes and 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. 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 ultimate disposition of apartments in our high barrier-to-entry markets. To help fulfill this goal, we regularly (i) monitor our investment allocation by geographic market and product type, (ii) develop, redevelop and acquire apartment communities in high barrier-to-entry markets with growing or high potential for demand and 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

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proceeds from those sales, and (iv) endeavor to maintain a capital structure that is aligned with our business risks such that we maintain continuous access to cost-effective capital. Our long-term strategy is to more deeply penetrate the high barrier-to-entry markets in our chosen regions with a broad range of products and services and intense focus on our customer. 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, 2008, excluding acquisitions for the Fund (as defined below), we acquired two apartment communities and purchased our partner’s interest in a joint venture that owns an apartment community. All three communities’ 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 18 apartment communities, including a community held by a joint venture in which we held a 25% equity interest, disposed of one investment in a real estate joint venture and completed the development of 27 apartment communities and the redevelopment of seven apartment communities, including communities we redeveloped for the Fund (as defined below).
During this period, we also realized gains from the sale of a community owned by AvalonBay Value Added Fund, L.P. (the “Fund”), an institutional discretionary investment fund, which we manage and in which we own a 15.2% interest. The Fund acquired communities with the objective of either redeveloping or repositioning them, or taking advantage of market cycle timing and improved operating performance. Since its inception in March 2005, the Fund has acquired 20 communities and sold one community in 2008. The investment period for the Fund ended in March 2008.
In September 2008, we formed AvalonBay Value Added Fund II, L.P. (“Fund II”), an additional private, discretionary investment vehicle which we manage and in which we currently own a 45% interest. At final closing, the aggregate investor commitments to Fund II and our commitment and percentage interest in Fund II may change.
Fund II will seek to create value through redevelopment, enhanced operations and/or improving market fundamentals of communities that it will acquire, principally in our markets. A more detailed description of the Fund and Fund II 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 2008, we sold 11 assets including one Fund asset, resulting in a gain in accordance with U.S. generally accepted accounting principles (“GAAP”) of $288,384,000.
As a result of the recent economic downturn and corresponding adverse impacts on employment and credit availability, we decreased our construction volume during 2008 (as measured by total projected capitalized cost at completion) and reduced our planned development activity for 2009. We do not anticipate starting any new development during the first half of 2009. Development starts in the second half of 2009, if any, will be evaluated based on our assessment of economic, real estate and capital market conditions at that time. We do anticipate an increase in our redevelopment activity for both wholly owned assets and assets held by the Fund.
For 2009, we anticipate asset sales in the range of $100,000,000 to $200,000,000, dependent on strategic and value realization opportunities. The level of our disposition activity also depends on real estate and capital market conditions. 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.
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 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 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. We currently own land that is held for development with an aggregate carrying basis under GAAP of $239,456,000 on which we have not yet commenced construction.
Except for certain mid-rise and high-rise apartment communities where we may elect to use third-party general contractors or construction managers, when we start construction we act as our own general contractor and construction manager. 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.
When there is increased competition for desirable development opportunities, we will in some cases be engaged in more complicated developments. For example, at times we have acquired and may in the future acquire existing commercial buildings with the intent to pursue rezoning, tenant terminations or expirations and demolition of the existing structures. 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 of

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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 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 by issuing debt or equity securities. 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 2005 we formed the Fund which, until its investment period closed in March 2008, served as the exclusive vehicle through which we acquired additional investments in apartment communities, subject to limited exceptions. In September 2008, we formed Fund II, which will serve as the exclusive vehicle through which we will 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, 2008, Fund II had made no investments.
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 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

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revenue and control costs through careful leasing decisions, maintenance decisions and financial management.
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 have consistently maintained, and intend to continue to maintain, a capital structure that provides us with flexibility in meeting the financial obligations and opportunities presented by our real estate development and ownership business. We estimate that a portion of our short-term liquidity needs will be met from retained operating cash, borrowings under our variable rate unsecured credit facility and sales of current operating communities. If required to meet the balance of our current or anticipated liquidity needs, we will borrow funds under our existing unsecured credit facility, sell existing communities or land and/or issue 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 or partnerships. Our decision whether to hold an apartment community in fee simple or to have an indirect interest in the community through a joint venture or partnership 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 or partnership vehicle is used. Investments in joint ventures or partnerships are not limited to a specified percentage of our assets. Each joint venture or partnership 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 or partnership agreement.
From its inception in 2005 until the investment period closed in March 2008, the Fund 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 will now serve as the exclusive vehicle through which we will 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 four institutional investors, including us, with a combined equity capital commitment of $333,000,000. A significant portion of the investments made in Fund II by its investors are being made through

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AvalonBay Value Added REIT II, LP, a Delaware limited partnership that intends to qualify as a REIT under the Internal Revenue Code (the “Fund II REIT”). A wholly owned subsidiary of the Company is the general partner of Fund II and has committed $150,000,000 to Fund II and the Fund II REIT (none of which has been invested as of January 31, 2009) representing a 45% combined general partner and limited partner equity interest. At final closing, the aggregate investor commitments to Fund II and our commitment and percentage interest in Fund II may change.
As of January 31, 2009, Fund II has made no investments.
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. On occasion, 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, 2008, we had a total of 425,251 square feet of rentable retail space that produced gross rental revenue in 2008 of $10,166,000 (1.2% 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 64 for-sale town homes at 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, 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 proposition 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

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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”.
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. 20002. You may call the SEC at 1-800-SEC-0330 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 20 Board 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, 2009, we had 1,830 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 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 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;
 
  •   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 lawsuits 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 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;
 
  •   loan fees;
 
  •   permits;
 
  •   professional fees;
 
  •   allocated development or redevelopment overhead; and

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  •   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 Fund investments.
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.
Compliance 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 (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, may result in lower revenue growth or significant unanticipated expenditures.
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 continue to 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.
The capital and credit markets have been experiencing extreme volatility and disruption, and this has affected the amounts, sources and cost of capital available to us. For example, during 2008 we used secured property financing more than in the past, as the interest rate we incur for that source of financing has remained relatively steady, and we may continue to rely more heavily on secured financings. We are unable to predict whether, or to what extent or for how long, the current capital market conditions will persist. 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 further 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 unsecured credit line will fulfill their lending obligations thereunder, but if economic conditions deteriorate further 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 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, in order for us to continue to qualify as a REIT, and 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, variable interest rate debt. 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 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, 2008, approximately 6.9% 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 aggressively and, in consequence, can also limit increases in 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.
Risks related to indebtedness.
We have a $1,000,000,000 revolving variable rate unsecured 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 unsecured credit facility, our unsecured term loan and the indentures 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.
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 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.

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We may in the future choose to pay dividends in our own stock, in which case stockholders may be required to pay tax in excess of the cash you receive.
We may in the future 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, if a significant number of our stockholders sell shares of our stock in order to pay taxes owed on dividends, that may put downward pressure on the trading price of our stock.
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 in Item 1., “Business,” above, through a taxable REIT subsidiary that is a joint venture partner, we have a 50% economic interest in a 64 town home 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 evaluate accurately local apartment market conditions; an inability to obtain land for development or to identify appropriate acquisition opportunities; an inability to hire and retain key

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personnel; and 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.
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. Partnership or joint venture investments 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 a discretionary investment fund.
We formed the Fund which, through a wholly owned subsidiary, we manage as the general partner and in which we have invested approximately $48,000,000 at December 31, 2008, representing an equity interest of approximately 15%. This presents risks, including the following:
  •   investors in the Fund may fail to make their capital contributions when due and, as a result, the Fund may be unable to execute its investment objectives;
 
  •   our subsidiary that is the general partner of the Fund is generally liable, under partnership law, for the debts and obligations of the Fund, subject to certain exculpation and indemnification rights pursuant to the terms of the partnership agreement of the Fund;
 
  •   investors in the Fund 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 Fund;
 
  •   while we have broad discretion to manage the Fund and make investment decisions on behalf of the Fund, 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 Fund to make certain investments or implement certain decisions that we consider beneficial; and
 
  •   we may be liable and/or our status as a REIT may be jeopardized if either the Fund, or the REIT through which a number of investors have invested in the Fund and which we manage, fails to comply with various tax or other regulatory matters.
We have also formed Fund II which, through a wholly owned subsidiary, we manage as the general partner and to which we have committed $150,000,000, representing a current equity interest of approximately 45%. This presents 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 subsidiary that is the general partner of Fund II is generally liable, under partnership law, for the debts and obligations of Fund II, subject to certain exculpation and indemnification rights pursuant to the terms of the partnership agreement of Fund II;
 
  •   investors in Fund II 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 Fund II;
 
  •   while we have broad discretion to manage Fund II and make investment decisions on behalf of Fund II, 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 Fund II 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

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  •   we may be liable and/or our status as a REIT may be jeopardized if either Fund II , or the Fund II REIT through which a number of investors have invested in Fund II and which we manage, fails 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.
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

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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.
All of our stabilized operating communities, and all of the communities that we are currently developing or redeveloping, 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.
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;

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  •   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 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 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 to otherwise address concerns about concentrations of ownership of our stock, our charter generally prohibits ownership (directly, indirectly by virtue of the attribution provisions of the Internal Revenue 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

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discretion waive or modify the ownership limit for one or more persons. 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.
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, 2008, the Established Communities are communities that are consolidated for financial reporting purposes, had stabilized occupancy and operating expenses as of January 1, 2007, 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%.

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  •   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.
Development Communities are communities that are under construction and for which a certificate of occupancy has not been received. 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.
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.
As of December 31, 2008, 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
    23       5,351  
Metro NY/NJ
    17       5,309  
Mid-Atlantic/Midwest
    18       6,122  
Pacific Northwest
    6       1,320  
Northern California
    20       5,657  
Southern California
    11       3,430  
 
               
Total Established
    95       27,189  
 
               
 
               
Other Stabilized Communities:
               
New England
    10       3,130  
Metro NY/NJ
    14       4,044  
Mid-Atlantic/Midwest
    9       2,443  
Pacific Northwest
    4       1,058  
Northern California
    10       2,820  
Southern California
    9       1,675  
 
               
Total Other Stabilized
    56       15,170  
 
               
 
               
Lease-Up Communities
    4       759  
 
               
Redevelopment Communities
    9       2,610  
 
               
 
               
Total Current Communities
    164       45,728  
 
               
 
               
Development Communities
    14       4,564  
 
               
 
               
Development Rights
    27       7,304  
 
               
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. The Current Communities, as of January 31, 2009, include 125 garden-style (of

18


 

which 21 are mixed communities and include town homes), 22 high-rise and 17 mid-rise apartment communities. The Current Communities offer many attractive amenities including some or all of the following:
  •   vaulted ceilings;
 
  •   lofts;
 
  •   fireplaces;
 
  •   patios/decks; and
 
  •   modern appliances.
Other features at various communities may include:
  •   swimming pools;
 
  •   fitness centers;
 
  •   tennis courts; and
 
  •   business centers.
We also have an extensive and ongoing maintenance program to keep all communities and apartment homes substantially free of deferred maintenance and, where vacant, available for immediate occupancy. We believe that 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 this will ultimately achieve higher rental rates and occupancy levels while minimizing resident turnover and operating expenses.

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     Our Current Communities are located in the following geographic markets:
                                                 
    Number of   Number of   Percentage of total
    communities at   apartment homes at   apartment homes at
    1-31-08   1-31-09   1-31-08   1-31-09   1-31-08   1-31-09
New England
    36       36       9,600       9,077       20.2 %     19.9 %
Boston, MA
    22       24       5,788       6,460       12.7 %     14.2 %
Fairfield County, CT
    14       12       3,812       2,617       7.5 %     5.7 %
 
                                               
Metro NY/NJ
    28       31       7,947       9,353       17.5 %     20.4 %
Long Island, NY
    7       7       1,732       1,732       3.8 %     3.8 %
Northern New Jersey
    5       5       1,618       1,618       3.6 %     3.5 %
Central New Jersey
    6       7       2,042       2,258       4.5 %     4.9 %
New York, NY
    10       12       2,555       3,745       5.6 %     8.2 %
 
                                               
Mid-Atlantic/Midwest
    32       30       9,770       9,213       21.5 %     20.2 %
Baltimore, MD
    9       8       1,987       1,830       4.4 %     4.0 %
Washington, DC
    16       16       5,831       5,831       12.8 %     12.8 %
Chicago, IL
    7       6       1,952       1,552       4.3 %     3.4 %
 
                                               
Pacific Northwest
    12       11       3,111       2,746       6.8 %     6.0 %
Seattle, WA
    12       11       3,111       2,746       6.8 %     6.0 %
 
                                               
Northern California
    34       32       9,546       8,879       20.9 %     19.4 %
Oakland-East Bay, CA
    7       8       2,089       2,394       4.6 %     5.2 %
San Francisco, CA
    11       11       2,489       2,489       5.5 %     5.4 %
San Jose, CA
    16       13       4,968       3,996       10.8 %     8.8 %
 
                                               
Southern California
    21       24       5,958       6,460       13.1 %     14.1 %
Los Angeles, CA
    11       12       3,214       3,345       7.1 %     7.3 %
Orange County, CA
    7       8       1,686       1,896       3.7 %     4.1 %
San Diego, CA
    3       4       1,058       1,219       2.3 %     2.7 %
 
                                               
 
    163       164       45,932       45,728       100.0 %     100.0 %
 
                                               
We manage and operate substantially all of our Current Communities. During the year ended December 31, 2008, we completed construction of 4,036 apartment homes in 13 communities and sold 3,059 apartment homes in ten communities. In addition, the Fund sold 400 apartment homes in one community. The average age of our Current Communities, on a weighted average basis according to number of apartment homes, is 14.0 years. When adjusted to reflect redevelopment activity, as if redevelopment were a new construction completion date, the average age of our Current Communities is 8.7 years.
Of the Current Communities, as of January 31, 2009, we own:
  •   a full fee simple, or absolute, ownership interest in 125 operating communities, eight of which are on land subject to land leases expiring in October 2026, November 2028, July 2029, December 2034, January 2062, April 2095, April 2095, 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 the Fund, which owns a fee simple interest in 19 operating communities;
 
  •   a general partnership interest in two partnerships structured as “DownREITs,” as described more fully below, that own an aggregate of 10 communities;
 
  •   a membership interest in 6 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.
We also hold, directly or through wholly owned subsidiaries, the full fee simple ownership interest in the 14

20


 

Development Communities, all of which are currently consolidated for financial reporting purposes and three of which are subject to land leases expiring in September 2105, December 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, 2009, there were 19,430 DownREIT partnership units outstanding. The DownREIT partnerships are consolidated for financial reporting purposes.

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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 economic   rental rate   Financial
        Number of   rentable area       completion /   size   occupancy at   occupancy   $ per   $ per   reporting cost
    City and state   homes   (Sq. Ft.)   Acres   acquisition   (Sq. Ft.)   12/31/08   2008   2007   Apt (4)   Sq. Ft.   (5)
CURRENT COMMUNITIES
                                               
 
                                               
NEW ENGLAND
                                               
Boston, MA
                                               
Avalon at Lexington
  Lexington, MA   198   237,855   16.1   1994   1,201   97.5%   97.6%   96.5%   1,826   1.48   16,461
Avalon Oaks
  Wilmington, MA   204   237,167   22.5   1999   1,163   96.6%   95.6%   95.4%   1,481   1.22   21,275
Avalon Summit
  Quincy, MA   245   224,974   8.0   1986/1996   918   95.5%   97.1%   96.0%   1,346   1.42   17,694
Avalon Essex
  Peabody, MA   154   201,063   11.1   2000   1,306   95.5%   96.3%   96.5%   1,574   1.16   21,956
Avalon at Faxon Park
  Quincy, MA   171   183,954   8.3   1998   1,076   94.2%   95.7%   95.9%   1,667   1.48   15,884
Avalon at Prudential Center
  Boston, MA   780   759,130   1.0   1968/1998   973   96.2%   97.5%   97.0%   2,932   2.94   157,295
Avalon Oaks West
  Wilmington, MA   120   133,376   27.0   2002   1,111   93.3%   93.9%   95.0%   1,400   1.18   16,874
Avalon Orchards
  Marlborough, MA   156   179,227   23.0   2002   1,149   96.2%   97.0%   96.0%   1,572   1.33   21,351
Avalon at Flanders Hill
  Westborough, MA   280   301,675   62.0   2003   1,077   94.6%   95.8%   96.0%   1,511   1.34   37,564
Avalon at Newton Highlands (8)
  Newton, MA   294   339,537   7.0   2003   1,155   94.2%   96.2%   95.5%   2,300   1.92   56,815
Avalon at The Pinehills I
  Plymouth, MA   101   151,629   6.0   2004   1,501   95.0%   95.9%   95.8%   1,856   1.19   19,984
Avalon at Crane Brook
  Peabody, MA   387   433,778   20.0   2004   1,121   96.4%   96.4%   95.7%   1,360   1.17   54,824
Essex Place
  Peabody, MA   286   250,473   18.0   2004   876   91.6%   88.8% (2)  96.3% (2)  1,155   1.17 (2)  34,565
Avalon at Bedford Center
  Bedford, MA   139   159,704   38.0   2005   1,149   93.5%   95.3%   95.6%   1,739   1.44   24,804
Avalon Chestnut Hill
  Chestnut Hill, MA   204   271,899   4.7   2007   1,333   92.6%   93.1%   78.8%   2,337   1.63   60,353
Avalon Shrewsbury
  Shrewsbury, MA   251   274,780   25.5   2007   1,095   92.8%   95.0%   84.3%   1,377   1.20   35,761
Avalon Danvers
  Danvers, MA   433   512,991   75.0   2006   1,185   97.0%   86.4%   24.1% (3)  1,407   1.03   85,550
Avalon Woburn
  Woburn, MA   446   486,091   56.0   2007   1,090   98.4%   96.7%   61.4% (3)  1,581   1.40   82,986
Avalon at Lexington Hills
  Lexington, MA   387   511,454   23.0   2007   1,322   94.8%   71.1% (3)  15.5% (3)  1,811   2.91 (3)  86,351
Avalon Acton
  Acton, MA   380   373,690   50.3   2007   983   95.3%   59.2% (3)  7.5% (3)  1,258   3.00 (3)  63,686
Avalon Sharon
  Sharon, MA   156   178,628   27.2   2007   1,145   98.7%   62.3% (3)  N/A   1,508   1.96 (3)  30,011
Avalon at Center Place (11)
  Providence, RI   225   233,910   1.2   1991/1997   1,040   90.7%   94.5%   92.8%   2,174   1.98   29,254
 
                                               
Fairfield-New Haven, CT
                                               
Avalon Gates
  Trumbull, CT   340   389,047   37.0   1997   1,144   96.5%   96.5%   94.9%   1,645   1.39   37,584
Avalon Glen
  Stamford, CT   238   265,940   4.1   1991   1,117   95.8%   97.1%   97.2%   2,014   1.75   32,551
Avalon Springs
  Wilton, CT   102   160,159   12.0   1996   1,570   90.2%   94.2%   96.5%   3,072   1.84   17,276
Avalon Valley
  Danbury, CT   268   303,193   17.1   1999   1,131   90.7%   95.7%   96.8%   1,668   1.41   26,397
Avalon Orange
  Orange, CT   168   161,795   9.6   2005   963   95.2%   95.3%   95.1%   1,554   1.54   22,097
Avalon on Stamford Harbor
  Stamford, CT   323   337,572   12.1   2003   1,045   96.6%   96.5%   97.5%   2,544   2.35   62,931
Avalon New Canaan (9)
  New Canaan, CT   104   145,118   9.1   2002   1,395   94.2%   96.1%   94.3%   2,910   2.00   24,379
Avalon at Greyrock Place
  Stamford, CT   306   334,381   3.0   2002   1,093   93.8%   96.3%   97.5%   2,301   2.03   70,844
Avalon Danbury
  Danbury, CT   234   238,952   36.0   2005   1,021   92.7%   96.0%   95.5%   1,651   1.55   35,534
Avalon Darien
  Darien, CT   189   242,533   32.0   2004   1,283   91.0%   94.7%   96.2%   2,640   1.95   41,598
Avalon Milford I
  Milford, CT   246   230,246   22.0   2004   936   97.2%   96.2%   96.1%   1,466   1.51   31,502
Avalon Huntington
  Shelton, CT   99   145,573   7.1   2008   1,470   34.3%   17.0% (3)  N/A   2,421   0.28 (3)  23,956  
 
                                               
METRO NY/NJ
                                               
Long Island, NY
                                               
Avalon Commons
  Smithtown, NY   312   385,290   20.6   1997   1,235   92.9%   95.0%   95.4%   2,145   1.65   34,068
Avalon Towers
  Long Beach, NY   109   135,036   1.3   1990/1995   1,239   95.4%   97.4%   96.8%   3,596   2.83   21,482
Avalon Court
  Melville, NY   494   601,342   35.4   1997/2000   1,217   93.5%   94.2%   95.3%   2,474   1.91   60,189
Avalon at Glen Cove South (11)
  Glen Cove, NY   256   262,285   4.0   2004   1,025   93.0%   95.8%   94.5%   2,362   2.21   67,965
Avalon Pines I
  Coram, NY   298   364,124   32.0   2005   1,222   93.6%   95.8%   95.7%   1,985   1.56   46,876
Avalon at Glen Cove North (11)
  Glen Cove, NY   111   100,851   1.3   2007   909   93.7%   96.8%   50.2% (3)  2,080   2.22   39,913
Avalon Pines II
  Coram, NY   152   183,857   42.0   2006   1,210   92.1%   95.2%   96.3%   1,974   1.55   24,755

22


 

Profile of Current, Development and Unconsolidated Communities (1)
(Dollars in thousands, except per apartment home data)
                                                 
                                        Average    
            Approx.       Year of   Average   Physical   Average economic   rental rate   Financial
        Number of   rentable area       completion /   size   occupancy at   occupancy   $ per   $ per   reporting cost
    City and state   homes   (Sq. Ft.)   Acres   acquisition   (Sq. Ft.)   12/31/08   2008   2007   Apt (4)   Sq. Ft.   (5)
Northern New Jersey
                                               
Avalon Cove
  Jersey City, NJ   504   640,467   11.0   1997   1,271   97.6%   96.1%   97.5%   3,014   2.28   93,461
Avalon at Edgewater
  Edgewater, NJ   408   438,670   7.6   2002   1,075   96.8%   96.3%   95.2%   2,399   2.15   75,355
Avalon at Florham Park
  Florham Park, NJ   270   330,410   41.9   2001   1,224   97.0%   95.8%   96.1%   2,696   2.11   42,114
Avalon Lyndhurst
  Lyndhurst, NJ   328   352,462   5.8   2006   1,075   94.5%   94.9%   57.0% (3)  2,205   1.95   80,978
 
                                               
Central New Jersey
                                               
Avalon Run East (8)
  Lawrenceville, NJ   206   274,933   27.1   1996   1,335   97.1%   95.1%   96.2%   1,638   1.17   16,462
Avalon Watch
  West Windsor, NJ   512   496,141   64.4   1988   969   95.1%   96.0%   95.6%   1,438   1.42   30,196
Avalon at Freehold
  Freehold, NJ   296   317,416   40.3   2002   1,072   97.0%   96.2%   97.5%   1,780   1.60   34,810
Avalon Run East II
  Lawrenceville, NJ   312   341,292   70.5   2003   1,094   95.5%   96.0%   96.2%   1,820   1.60   52,201
Avalon Run (7)
  Lawrenceville, NJ   426   443,168   9.0   1994   1,040   97.2%   96.0%   96.2%   1,477   1.36   60,263
Avalon at Tinton Falls
  Tinton Falls, NJ   216   240,747   35.0   2007   1,115   95.8%   56.3% (3)  N/A   1,412   2.83 (3)  40,518
 
                                               
New York, NY
                                               
Avalon Gardens
  Nanuet, NY   504   617,992   62.5   1998   1,226   96.6%   97.0%   96.9%   2,148   1.70   55,580
Avalon Green
  Elmsford, NY   105   115,038   16.9   1995   1,096   97.1%   97.4%   97.3%   2,415   2.15   13,951
Avalon Willow
  Mamaroneck, NY   227   240,459   4.0   2000   1,059   94.7%   98.0%   96.5%   2,299   2.13   47,570
The Avalon
  Bronxville, NY   110   148,335   1.5   1999   1,349   96.4%   97.7%   97.4%   3,700   2.68   31,544
Avalon on the Sound (11)
  New Rochelle, NY   412   415,369   2.4   2001   1,008   97.3%   96.2%   95.2%   2,269   2.17   117,260
Avalon Riverview I (11)
  Long Island City, NY   372   352,988   1.0   2002   949   95.2%   96.8%   97.6%   3,229   3.30   94,698
Avalon Bowery Place I
  New York, NY   206   162,000   1.1   2006   786   94.7%   96.2%   89.8%   3,982   4.87   92,216
Avalon Riverview North (11)
  Long Island City, NY   602   519,092   1.8   2007   862   96.3%   92.2% (3)  30.6% (3)  3,575   3.82 (3)  173,788
Avalon on the Sound East (11)
  New Rochelle, NY   588   622,999   1.7   2007   1,060   96.1%   79.6% (3)  27.8% (3)  3,463   2.60 (3)  179,477
Avalon Bowery Place II
  New York, NY   90   73,624   1.1   2007   818   84.4%   97.1%   42.4% (3)  3,754   4.46   55,623
 
                                               
MID-ATLANTIC/MIDWEST
                                               
Baltimore, MD
                                               
Avalon at Fairway Hills
  Columbia, MD   192   193,784   15.0   1987/1996   1,009   97.4%   94.6%   95.8%   1,275   1.19   10,436
Avalon at Fairway Hills II (7)
  Columbia, MD   192   192,560   29.0   1987/1996   1,003   95.8%   93.9%   95.9%   1,297   1.21   12,656
Avalon Symphony Woods (SGlen)
  Columbia, MD   176   179,880   10.0   1986   1,022   86.4%   88.8% (2)  93.2%   1,354   1.18 (2)  11,706
Avalon at Fairway Hills III (7)
  Columbia, MD   336   337,683   15.0   1987/1996   1,005   94.3%   94.8%   95.5%   1,416   1.34   29,596
Avalon Symphony Woods (SGate)
  Columbia, MD   215   214,670   12.7   1986/2006   998   86.1%   90.3% (2)  93.5%   1,233   1.12 (2)  38,782
 
                                               
Washington, DC
                                               
Avalon at Foxhall
  Washington, DC   308   297,876   2.7   1982   967   93.5%   96.3%   96.2%   2,291   2.28   44,994
Avalon at Gallery Place I
  Washington, DC   203   184,157   0.5   2003   907   97.0%   96.7%   95.4%   2,511   2.68   49,045
Avalon at Decoverly
  Rockville, MD   368   368,732   24.0   1991/1995   1,002   96.5%   96.2%   96.2%   1,462   1.40   32,842
Avalon Fields I
  Gaithersburg, MD   192   197,280   5.0   1996   1,028   97.9%   96.7%   97.3%   1,391   1.31   14,468
Avalon Fields II
  Gaithersburg, MD   96   100,268   5.0   1998   1,044   97.9%   97.0%   95.9%   1,580   1.47   8,333
Avalon Knoll
  Germantown, MD   300   290,544   26.7   1985   968   96.3%   96.5%   96.0%   1,215   1.21   9,000
Avalon at Rock Spring (9) (11)
  North Bethesda, MD   386   387,884   10.2   2003   1,005   98.4%   96.8%   95.0%   1,774   1.71   82,340
Avalon at Grosvenor Station
  North Bethesda, MD   497   472,001   10.0   2004   950   95.6%   97.0%   95.8%   1,825   1.86   82,181
Avalon at Traville (8)
  North Potomac, MD   520   575,529   47.9   2004   1,107   96.5%   97.0%   96.2%   1,761   1.54   70,014
Avalon at Decoverly II
  Rockville, MD   196   182,560   10.8   2007   931   93.4%   95.2%   85.3% (3)  1,540   1.57   30,594
Avalon Fair Lakes
  Fairfax, VA   420   354,945   24.3   1989/1996   845   92.4%   93.3% (2)  90.0% (2)  1,380   1.52 (2)  37,872
Avalon at Ballston — Washington Towers
  Arlington, VA   344   294,954   4.1   1990   857   96.8%   96.2%   96.2%   1,811   2.03   39,215
Avalon at Cameron Court
  Alexandria, VA   460   478,068   16.0   1998   1,039   94.6%   96.2%   95.6%   1,874   1.73   44,124
Avalon at Providence Park
  Fairfax, VA   141   148,282   9.3   1988/1997   1,052   96.5%   96.7%   97.0%   1,558   1.43   11,874
Avalon Crescent
  McLean, VA   558   613,426   19.1   1996   1,099   93.9%   96.5%   95.6%   1,944   1.71   57,915
Avalon at Arlington Square
  Arlington, VA   842   628,433   20.1   2001   746   94.8%   96.8%   96.6%   1,879   2.44   113,201

23


 

Profile of Current, Development and Unconsolidated Communities (1)
(Dollars in thousands, except per apartment home data)
                                                                                             
                                                        Average economic   Average    
                Approx.           Year of   Average   Physical   occupancy   rental rate   Financial
        Number of   rentable area           completion /   size   occupancy at                   $ per   $ per   reporting cost
    City and state   homes   (Sq. Ft.)   Acres   acquisition   (Sq. Ft.)   12/31/08   2008   2007   Apt (4)   Sq. Ft.   (5)
Chicago, IL
                                                                                           
Avalon at Danada Farms (8)
  Wheaton, IL     295       351,206       19.2       1997       1,191       95.6 %     96.2 %     95.5 %     1,432       1.16       40,030  
Avalon at Stratford Green (8)
  Bloomingdale, IL     192       237,124       12.7       1997       1,235       94.8 %     96.7 %     96.1 %     1,460       1.14       22,238  
Avalon Arlington Heights
  Arlington Heights, IL     409       352,236       2.8       1987/2000       861       96.6 %     96.2 %     94.3 % (2)     1,543       1.72       56,947  
 
                                                                                           
PACIFIC NORTHWEST
                                                                                           
Seattle, WA
                                                                                           
Avalon Redmond Place
  Redmond, WA     222       219,075       8.4       1991/1997       987       91.4 %     86.4 %  (2)     90.1 %  (2)     1,374       1.20  (2)     31,882  
Avalon at Bear Creek
  Redmond, WA     264       296,530       22.2       1998       1,123       93.9 %     96.6 %     95.5 %     1,437       1.24       35,858  
Avalon Bellevue (8)
  Bellevue, WA     202       170,965       1.7       2001       846       95.0 %     94.8 %     96.6 %     1,609       1.80       30,966  
Avalon RockMeadow
  Bothell, WA     206       246,683       11.2       2000       1,197       95.6 %     95.2 %     96.6 %     1,332       1.06       24,993  
Avalon WildReed (8)
  Everett, WA     234       266,580       23.0       2000       1,139       95.3 %     95.8 %     96.7 %     1,153       0.97       23,096  
Avalon HighGrove (8)
  Everett, WA     391       428,962       19.0       2000       1,097       93.4 %     94.8 %     96.6 %     1,131       0.98       39,879  
Avalon ParcSquare (8)
  Redmond, WA     124       131,706       2.0       2000       1,062       95.2 %     96.9 %     96.5 %     1,628       1.49       19,516  
Avalon Brandemoor (8)
  Lynwood, WA     424       465,257       27.0       2001       1,097       94.6 %     95.1 %     96.1 %     1,214       1.05       45,671  
Avalon Belltown
  Seattle, WA     100       95,201       0.7       2001       952       97.0 %     95.3 %     97.2 %     1,813       1.82       18,499  
Avalon Meydenbauer
  Bellevue, WA     368       333,502       3.6       2008       906       93.5 %     48.1 %  (3)     N/A       1,783       1.89  (3)     89,119  
 
                                                                                           
NORTHERN CALIFORNIA
                                                                                           
Oakland-East Bay, CA
                                                                                           
Avalon Fremont
  Fremont, CA     308       386,277       14.3       1994       1,254       97.1 %     96.3 %     97.4 %     1,769       1.36       56,939  
Avalon Dublin
  Dublin, CA     204       179,004       13.0       1989/1997       877       95.6 %     96.7 %     97.3 %     1,578       1.74       28,366  
Avalon Pleasanton
  Pleasanton, CA     456       366,062       14.7       1988/1994       803       97.8 %     96.8 %     95.8 %     1,443       1.74       63,005  
Avalon at Union Square
  Union City, CA     208       150,320       8.5       1973/1996       723       94.2 %     96.7 %     97.6 %     1,293       1.73       22,738  
Waterford
  Hayward, CA     544       452,043       11.1       1985/1986       831       93.8 %     93.9 %     96.5 %     1,279       1.45       62,190  
Avalon at Willow Creek
  Fremont, CA     235       191,935       13.5       1985/1994       817       98.3 %     97.0 %     98.1 %     1,558       1.85       36,493  
Avalon at Dublin Station I
  Dublin, CA     305       300,760       4.7       2006       986       95.4 %     67.6 %  (3)     2.0 %  (3)     1,723       2.02  (3)     84,269  
 
                                                                                           
San Francisco, CA
                                                                                           
Avalon at Cedar Ridge
  Daly City, CA     195       141,411       7.0       1972/1997       725       95.4 %     97.0 %     98.1 %     1,593       2.13       27,534  
Avalon at Nob Hill
  San Francisco, CA     185       108,712       1.4       1990/1995       588       97.3 %     96.8 %     96.9 %     1,957       3.22       28,191  
Crowne Ridge
  San Rafael, CA     254       222,685       21.9       1973/1996       877       95.3 %     96.8 %     97.8 %     1,509       1.67       33,100  
Avalon Foster City
  Foster City, CA     288       222,364       11.0       1973/1994       772       97.2 %     97.1 %     97.1 %     1,633       2.05       44,168  
Avalon Towers by the Bay
  San Francisco, CA     227       285,881       1.0       1999       1,259       97.4 %     97.5 %     97.6 %     3,140       2.43       67,049  
Avalon Pacifica
  Pacifica, CA     220       186,800       21.9       1971/1995       849       97.3 %     97.0 %     96.9 %     1,682       1.92       32,360  
Avalon Sunset Towers
  San Francisco, CA     243       171,854       16.0       1961/1996       707       97.1 %     96.3 %     96.9 %     1,943       2.64       28,879  
Avalon at Diamond Heights
  San Francisco, CA     154       123,566       3.0       1972/1994       802       94.2 %     95.9 %  (2)     97.7 %     1,852       2.21  (2)     27,679  
Avalon at Mission Bay North
  San Francisco, CA     250       240,368       1.4       2003       961       96.8 %     96.0 %     94.5 %     3,320       3.32       92,936  

24


 

Profile of Current, Development and Unconsolidated Communities (1)
(Dollars in thousands, except per apartment home data)
                                                                                             
                                                        Average economic   Average    
                Approx.           Year of   Average   Physical   occupancy   rental rate   Financial
        Number of   rentable area           completion /   size   occupancy at                   $ per   $ per   reporting cost
    City and state   homes   (Sq. Ft.)   Acres   acquisition   (Sq. Ft.)   12/31/08   2008   2007   Apt (4)   Sq. Ft.   (5)
San Jose, CA
                                                                                           
Avalon Campbell
  Campbell, CA     348       329,816       10.8       1995       948       96.0 %     96.9 %     97.7 %     1,761       1.80       60,533  
CountryBrook
  San Jose, CA     360       322,992       14.0       1985/1996       897       95.0 %     95.9 %     97.0 %     1,584       1.69       52,751  
Avalon at River Oaks
  San Jose, CA     226       211,750       4.0       1990/1996       937       95.1 %     97.3 %     98.3 %     1,713       1.78       45,008  
Avalon at Parkside
  Sunnyvale, CA     192       204,510       8.0       1991/1996       1,065       98.4 %     97.3 %     97.5 %     1,987       1.82       38,327  
Avalon on the Alameda
  San Jose, CA     305       320,464       8.9       1999       1,051       94.8 %     97.3 %     97.7 %     2,108       1.95       56,905  
Avalon Rosewalk
  San Jose, CA     456       459,162       16.6       1997/1999       1,007       97.4 %     96.4 %     97.2 %     1,748       1.67       79,863  
Avalon Silicon Valley
  Sunnyvale, CA     710       659,729       13.6       1997       929       95.8 %     96.1 %     96.2 %     2,049       2.12       123,316  
Avalon Mountain View (9)
  Mountain View, CA     248       211,552       10.5       1986       853       84.7 %     88.0 %  (2)     96.6 %     1,923       1.98  (2)     56,180  
Avalon at Creekside
  Mountain View, CA     294       215,680       13.0       1962/1997       734       94.6 %     97.6 %     98.0 %     1,536       2.05       43,471  
Avalon at Cahill Park
  San Jose, CA     218       221,933       3.8       2002       1,018       97.7 %     97.6 %     97.7 %     2,121       2.03       52,707  
Avalon Towers on the Peninsula
  Mountain View, CA     211       218,392       1.9       2002       1,035       97.2 %     97.3 %     97.0 %     2,810       2.64       65,753  
Countrybrook II
  San Jose, CA     80       64,554       3.6       2007       807       91.3 %     96.8 %     95.9 %  (3)     1,552       1.86       17,891  
 
                                                                                           
SOUTHERN CALIFORNIA
                                                                                           
Orange County, CA
                                                                                           
Avalon Newport
  Costa Mesa, CA     145       122,415       6.6       1956/1996       844       98.6 %     96.3 %     97.7 %     1,707       1.95       10,417  
Avalon Mission Viejo
  Mission Viejo, CA     166       124,770       7.8       1984/1996       752       92.8 %     95.4 %     96.1 %     1,351       1.71       14,095  
Avalon at South Coast
  Costa Mesa, CA     258       210,922       8.0       1973/1996       818       93.8 %     94.4 %     96.4 %     1,467       1.70       26,030  
Avalon Santa Margarita
  Rancho Santa Margarita, CA     301       229,593       20.0       1990/1997       763       95.0 %     96.7 %     95.0 %     1,386       1.76       24,528  
Avalon at Pacific Bay
  Huntington Beach, CA     304       268,720       9.7       1971/1997       884       97.4 %     96.1 %     96.1 %     1,544       1.68       32,915  
Avalon Warner Place
  Canoga Park, CA     210       186,402       3.3       2007       888       91.9 %     57.2 % (3)     N/A       1,420       2.74  (3)     52,599  
 
                                                                                           
San Diego, CA
                                                                                           
Avalon at Mission Bay
  San Diego, CA     564       402,320       12.9       1969/1997       713       96.8 %     95.0 %     94.8 %     1,438       1.92       66,809  
Avalon at Mission Ridge
  San Diego, CA     200       208,125       4.0       1960/1997       1,041       94.5 %     94.9 %     96.2 %     1,656       1.51       22,633  
Avalon at Cortez Hill
  San Diego, CA     294       227,373       1.4       1973/1998       773       96.3 %     96.4 %     94.9 %     1,513       1.89       34,746  
Avalon Fashion Valley
  San Diego, CA     161       186,766       10.0       2008       1,160       30.4 %     15.3 %  (3)     N/A       2,380       0.25  (3)     63,641  

25


 

Profile of Current, Development and Unconsolidated Communities (1)
(Dollars in thousands, except per apartment home data)
                                                                                             
                                                        Average economic   Average    
                Approx.           Year of   Average   Physical   occupancy   rental rate   Financial
        Number of   rentable area           completion /   size   occupancy at                   $ per   $ per   reporting cost
    City and state   homes   (Sq. Ft.)   Acres   acquisition   (Sq. Ft.)   12/31/08   2008   2007   Apt (4)   Sq. Ft.   (5)
Los Angeles, CA
                                                                                           
Avalon at Media Center
  Burbank, CA     748       532,264       14.1       1961/1997       712       94.3 %     95.6 %     95.9 %     1,514       2.03       76,877  
Avalon Woodland Hills
  Woodland Hills, CA     663       597,871       18.2       1989/1997       902       85.5 %     76.9 % (2)     94.8 %     1,593       1.36  (2)     91,010  
Avalon at Warner Center
  Woodland Hills, CA     227       195,224       7.0       1979/1998       860       95.2 %     94.7 %     96.9 %     1,693       1.87       27,313  
Avalon Glendale (11)
  Burbank, CA     223       241,714       5.1       2003       1,084       89.7 %     94.2 %     95.0 %     2,357       2.05       41,480  
The Promenade
  Burbank, CA     400       360,587       6.9       1988/2002       901       92.0 %     96.7 %  (2)     97.8 %     1,936       2.08  (2)     77,672  
Avalon Camarillo
  Camarillo, CA     249       233,267       10.0       2006       937       91.6 %     94.5 %     94.9 %     1,623       1.64       48,210  
Avalon Wilshire
  Los Angeles, CA     123       125,193       1.6       2007       1,018       93.5 %     94.7 %     55.8 % (3)     2,684       2.50       46,732  
Avalon Encino
  Los Angeles, CA     131       131,220       2.0       N/A       1,002       38.9 %     15.7 %  (3)     N/A       2,475       0.69  (3)     61,017  
 
                                                                                           
DEVELOPMENT COMMUNITIES
                                                                                           
 
                                                                                           
Avalon Anaheim
  Anaheim, CA     251       302,480       3.5       N/A       1,205       N/A       N/A       N/A       N/A       N/A       92,029  
Avalon Union City
  Union City, CA     438       428,730       6.0       N/A       979       N/A       N/A       N/A       N/A       N/A       97,057  
Avalon Jamboree Village
  Irvine, CA     279       243,157       4.5       N/A       872       N/A       N/A       N/A       N/A       N/A       55,581  
Avalon at Mission Bay North III
  San Francisco, CA     260       261,361       1.5       N/A       1,005       N/A       N/A       N/A       N/A       N/A       109,420  
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       36,591  
Avalon Norwalk
  Norwalk, CT     311       312,018       4.5       N/A       1,003       N/A       N/A       N/A       N/A       N/A       20,238  
Avalon at Hingham Shipyard
  Hingham, MA     235       298,981       12.9       N/A       1,272       N/A       N/A       N/A       N/A       N/A       50,782  
Avalon Northborough I
  Northborough, MA     163       183,000       14.0       N/A       1,123       N/A       N/A       N/A       N/A       N/A       9,225  
Avalon Blue Hills
  Randolph, MA     276       307,085       23.1       N/A       1,113       N/A       N/A       N/A       N/A       N/A       29,519  
Avalon White Plains
  White Plains, NY     407       379,555       0.1       N/A       933       N/A       N/A       N/A       N/A       N/A       131,371  
Avalon Morningside Park (11)
  New York, NY     295       243,157       0.8       N/A       824       N/A       N/A       N/A       N/A       N/A       105,801  
Avalon Charles Pond
  Coram, NY     200       176,000       39.0       N/A       880       N/A       N/A       N/A       N/A       N/A       38,674  
Avalon Fort Greene
  Brooklyn, NY     631       498,632       1.0       N/A       790       N/A       N/A       N/A       N/A       N/A       143,887  
Avalon Towers Bellevue (11)
  Bellevue, WA     396       330,194       1.5       N/A       834       N/A       N/A       N/A       N/A       N/A       13,425  
 
                                                                                           
UNCONSOLIDATED COMMUNITIES
                                                                                           
 
                                                                                           
Avalon at Mission Bay North II (9)
  San Francisco, CA     313       291,556       1.5       2006       931       93.6 %     95.0 %     83.3 %     3,226       3.29       N/A  
Avalon Del Rey (9)
  Los Angeles, CA     309       284,387       5.0       2006       920       91.6 %     92.7 %     96.5 %     2,100       2.11       N/A  
Avalon Chrystie Place I (9)(11)
  New York, NY     361       266,940       1.5       2005       739       95.8 %     96.9 %     96.1 %     4,208       5.51       N/A  
Avalon Juanita Village (10)
  Kirkland, WA     211       209,335       2.9       2005       992       96.2 %     95.3 %     95.2 %     1,602       1.54       N/A  
Avalon at Redondo Beach (6)
  Redondo Beach, CA     105       86,075       1.2       1971/2004       820       97.1 %     94.3 %     94.0 %     2,015       2.32       N/A  
Avalon Sunset (6)
  Los Angeles, CA     82       71,037       0.8       1987/2005       866       91.5 %     96.5 %     88.3 % (2)     1,997       2.23       N/A  
Civic Center (6)
  Norwalk, CA     192       174,378       8.7       1987/2005       908       89.1 %     93.6 %     85.5 % (2)     1,676       1.73       N/A  
Avalon Paseo Place (6)
  Fremont, CA     134       106,249       7.0       1987/2005       793       97.0 %     94.8 %  (2)     87.3 % (2)     1,433       1.71  (2)     N/A  
Avalon Yerba Buena (6)
  San Francisco, CA     160       159,604       0.9       2000/2006       998       97.5 %     97.1 %     97.1 %     3,059       2.98       N/A  
The Springs (6)
  Corona, CA     320       241,440       13.3       1987/2006       755       81.9 %     87.7 %     94.2 %     1,093       1.27       N/A  
Skyway Terrace (6)
  San Jose,CA     348       287,918       18.4       1994/2007       827       97.1 %     97.7 %     96.2 % (3)     1,470       1.74       N/A  
South Hills Apartments (6)
  West Covina, CA     85       107,150       5.3       1966/2007       1,261       89.4 %     88.0 % (2)     97.5 % (3)     1,715       1.20  (2)     N/A  
Avalon Lakeside (6)
  Wheaton, IL     204       162,821       12.4       2004       798       95.6 %     96.2 %     95.1 %     979       1.18       N/A  
Avalon at Poplar Creek (6)
  Schaumburg, IL     196       178,490       12.8       1986/2005       911       94.9 %     91.3 %     88.6 % (2)     1,190       1.19       N/A  
The Covington (6)
  Schaumburg, IL     256       201,924       13.2       1988/2006       789       98.0 %     96.2 % (2)     93.1 %     1,069       1.30  (2)     N/A  
Middlesex Crossing (6)
  Billerica, MA     252       188,915       13.0       2007       750       94.8 %     96.0 %     93.6 % (3)     1,248       1.60       N/A  
Colonial Towers/South Shore Manor (6)
  Weymouth, MA     211       154,957       7.7       1971/2007       734       94.8 %     95.8 % (2)     87.9 % (3)     1,043       1.36  (2)     N/A  

26


 

Profile of Current, Development and Unconsolidated Communities (1)
(Dollars in thousands, except per apartment home data)
                                                                                             
                                                        Average economic   Average    
                Approx.           Year of   Average   Physical   occupancy   rental rate   Financial
        Number of   rentable area           completion /   size   occupancy at                   $ per   $ per   reporting cost
    City and state   homes   (Sq. Ft.)   Acres   acquisition   (Sq. Ft.)   12/31/08   2008   2007   Apt (4)   Sq. Ft.   (5)
Avalon Columbia (6)
  Columbia, MD     170       180,452       11.3       1989/2004       1,061       96.5 %     96.3 %     96.0 % (2)     1,485       1.35       N/A  
Cedar Place (6)
  Columbia, MD     156       152,923       11.4       1972/2006       980       94.9 %     86.8 % (2)     95.3 %     1,158       1.03  (2)     N/A  
Avalon Centerpoint (6)
  Baltimore, MD     392       312,356       6.9       2005/2007       797       94.6 %     90.5 %     92.9 % (3)     909       1.03       N/A  
Avalon at Aberdeen Station (6)
  Aberdeen, NJ     290       414,585       16.8       2002/2006       1,430       99.0 %     96.5 %     96.1 %     1,790       1.21       N/A  
Avalon at Rutherford Station (6)
  East Rutherford, NJ     108       131,937       1.5       2005/2007       1,222       95.4 %     95.2 %     89.2 % (3)     2,237       1.74       N/A  
Avalon Crystal Hill (6)
  Pomona, NY     168       215,203       12.1       2001/2007       1,281       98.2 %     95.2 %     94.9 % (3)     2,020       1.50       N/A  
 
(1)   We own a fee simple interest in the communities listed, excepted as noted below.
 
(2)   Represents community which was under redevelopment during the year, resulting 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 generally accepted accounting principles. For current Development Communities, cost represents total costs incurred through December 31, 2008. 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.

27


 

Development Communities
As of December 31, 2008, we had 14 Development Communities under construction. We expect these Development Communities, when completed, to add a total of 4,564 apartment homes to our portfolio for a total capitalized cost, including land acquisition costs, of approximately $1,583,800,000. 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 2009 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 Morningside Park (4)
    295     $ 122.8       Q1 2007       Q3 2008       Q2 2009       Q3 2009  
   
New York, NY
                                               
2.  
Avalon White Plains
    407       154.0       Q2 2007       Q3 2008       Q4 2009       Q1 2010  
   
White Plains, NY
                                               
3.  
Avalon Anaheim Stadium
    251       102.3       Q2 2007       Q4 2008       Q3 2009       Q1 2010  
   
Anaheim, CA
                                               
4.  
Avalon Union City
    438       122.2       Q3 2007       Q2 2009       Q4 2009       Q2 2010  
   
Union City, CA
                                               
5.  
Avalon at the Hingham Shipyard
    235       53.5       Q3 2007       Q3 2008       Q2 2009       Q3 2009  
   
Hingham, MA
                                               
6.  
Avalon at Mission Bay North III
    260       153.8       Q4 2007       Q2 2009       Q4 2009       Q2 2010  
   
San Francisco, CA
                                               
7.  
Avalon Jamboree Village
    279       77.4       Q4 2007       Q2 2009       Q1 2010       Q3 2010  
   
Irvine, CA
                                               
8.  
Avalon Fort Greene
    631       306.8       Q4 2007       Q4 2009       Q1 2011       Q3 2011  
   
New York, NY
                                               
9.  
Avalon Charles Pond
    200       47.8       Q1 2008       Q1 2009       Q3 2009       Q1 2010  
   
Corham, NY
                                               
10.  
Avalon Blue Hills
    276       46.6       Q2 2008       Q2 2009       Q4 2009       Q2 2010  
   
Randolph, MA
                                               
11.  
Avalon Walnut Creek (4)
    422       156.7       Q3 2008       Q3 2010       Q1 2011       Q3 2011  
   
Walnut Creek, CA
                                               
12.  
Avalon Norwalk
    311       86.4       Q3 2008       Q3 2010       Q2 2011       Q4 2011  
   
Norwalk, CT
                                               
13.  
Avalon Northborough I
    163       27.4       Q4 2008       Q3 2009       Q1 2010       Q3 2010  
   
Northborough, MA
                                               
14.  
Avalon Towers Bellevue
    396       126.1       Q4 2008       Q2 2010       Q2 2011       Q4 2011  
   
Bellevue, WA
                                               
   
 
                                               
   
Total
    4,564     $ 1,583.8                                  
 
(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.

28


 

Redevelopment Communities
As of December 31, 2008, we had seven consolidated communities under redevelopment. We expect the total capitalized cost to redevelop these communities to be $95,400,000, excluding costs prior to redevelopment. In addition, the Fund has two communities under 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 Fund-owned communities, 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.
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.  
Essex Place
    286     $ 23.7     $ 34.5       Q3 2007       Q2 2009       Q4 2009  
   
Peabody, MA
                                               
2.  
Avalon Woodland Hills
    663       72.1       109.3       Q4 2007       Q3 2010       Q1 2011  
   
Woodland Hills, CA
                                               
3.  
Avalon at Diamond Heights
    154       25.3       30.2       Q4 2007       Q4 2010       Q2 2011  
   
San Francisco, CA
                                               
4.  
Avalon Symphony Woods I
    176       9.4       14.0       Q2 2008       Q3 2009       Q1 2010  
   
Columbia, MD
                                               
5.  
Avalon Symphony Woods II
    216       36.4       42.4       Q2 2008       Q3 2009       Q1 2010  
   
Columbia, MD
                                               
6.  
Avalon Mountain View
    248       51.6       60.1       Q2 2008       Q3 2009       Q1 2010  
   
MountainView, CA
                                               
7.  
The Promenade
    400       71.0       94.4       Q3 2008       Q2 2010       Q4 2010  
   
Burbank, CA
                                               
8.  
The Covington (3)
    256       32.6       34.9       Q4 2008       Q3 2009       Q4 2009  
   
Lombard, IL
                                               
9.  
Colonial Towers (3)
    211       21.8       25.8       Q4 2008       Q3 2009       Q4 2009  
   
Weymouth, MA
                                               
   
 
                                               
   
Total
    2,610     $ 343.9     $ 445.6                          
 
(1)   Total capitalized cost includes all capitalized costs projected to be or actually incurred to develop 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.
 
(3)   This community is owned by the Fund.

29


 

Development Rights
As of December 31, 2008, we are evaluating the future development of 27 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 7,304 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, 2008, there were cumulative capitalized costs (including legal fees, design fees and related overhead costs, but excluding land costs) of $57,365,000 relating to Development Rights that we consider probable for future development. In addition, land costs related to the pursuit of Development Rights (consisting of original land and additional carrying costs) of $239,456,000 are reflected as land held for development as of December 31, 2008 on the Consolidated Balance Sheet of the Consolidated Financial Statements set forth in Item 8 of this report.
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. Pre-development costs incurred in the pursuit of Development Rights 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 2008, we incurred a charge of approximately $12,500,000 of pre-development cost for development rights that we determined would not likely be developed.
Refer to Item I., “Business” for a discussion of our expected 2009 development starts. In addition, you should carefully review Section 1a., “Risk Factors,” for a discussion of the risks associated with Development Rights.

30


 

The table below presents a summary of these Development Rights:
                     
                Total  
        Estimated     capitalized  
        number     cost  
    Location   of homes     ($ millions) (1)  
1.  
Wilton, CT
    100     $ 30  
2.  
Seattle, WA
    204       63  
3.  
Rockville Centre, NY
    349       129  
4.  
Greenburgh, NY Phase II
    444       118  
5.  
Wood-Ridge, NJ
    406       104  
6.  
Cohasset, MA
    200       38  
7.  
Northborough, MA Phase II
    187       35  
8.  
North Bergen, NJ
    164       47  
9.  
Andover, MA
    115       26  
10.  
Garden City, NY
    160       58  
11.  
New York, NY
    681       307  
12.  
Plymouth, MA Phase II
    92       20  
13.  
Lynnwood, WA Phase II
    82       18  
14.  
West Long Branch, NJ
    180       34  
15.  
Rockville, MD
    240       62  
16.  
Shelton, CT
    251       66  
17.  
Seattle, WA II
    234       76  
18.  
San Francisco, CA
    173       51  
19.  
Boston, MA
    180       106  
20.  
Roselle Park, NJ
    249       54  
21.  
Dublin, CA Phase II
    405       126  
22.  
Tysons Corner, VA
    393       99  
23.  
Canoga Park, CA
    298       85  
24.  
Stratford, CT
    130       22  
25.  
Yaphank, NY
    343       57  
26.  
Brooklyn, NY
    832       443  
27.  
Maynard, MA
    212       39  
   
 
               
   
 
           
   
Total
    7,304     $ 2,313  
   
 
           
 
(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.

31


 

Land Acquisitions
We select land for development and follow established procedures that we believe minimize both the cost and the risks of development. During 2008, we acquired six land parcels for an aggregate purchase price of approximately $97,174,000, one of which we no longer plan to develop. The land parcels purchased, which are currently being developed or are held for future development, are as follows:
                                     
                Estimated     Total        
                number     capitalized        
        Gross     of apartment     cost (1)     Date  
        acres     homes     ($ millions)     acquired  
1.  
Avalon Ballard
    1.4       234     $ 320     January 2008
   
Seattle, WA
                               
2.  
Avalon North Bergen
    2.2       164       85     May 2008
   
North Bergen, NJ
                               
3.  
Avalon Norwalk
    4.4       311       41     July 2008
   
Norwalk, CT
                               
4.  
Avalon Willoughby West (2)
    4.2       832       158     November / December 2008
   
New York, NY
                               
5.  
Avalon at the Pinehills, Phase II
    4.5       92       103     December 2008
   
Plymouth, MA
                               
   
 
                               
   
Total
    16.7       1,633     $ 707          
 
(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.
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 variable rate unsecured 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, 2008 to January 31, 2009, we sold our interest in ten wholly owned communities, containing an aggregate of 3,059 apartment homes. The aggregate gross sales price from the dispositions of these assets was $564,950,000.
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 insured levels. We have in place with respect to communities located in California, for any single occurrence and in the aggregate, $75,000,000 of coverage with a deductible per building equal to five percent of the insured value of that building. Earthquake coverage outside of California is subject to a $100,000,000 limit, except with respect to the state of Washington, for which the limit is $65,000,000. Our earthquake insurance outside of California provides

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for a $100,000 deductible per occurrence except that the next $400,000 of loss per occurrence outside California will be treated as an additional deductible until the total deductible incurred exceeds $3,000,000.
On December 1, 2007, we elected to cancel and rewrite our property insurance policy for a 17 month term in order to take advantage of declining insurance premium rates. As a result, our property insurance premium decreased by approximately 15% with no material changes in coverage. We expect to renew this policy when it expires on May 1, 2009.
In August 2008, 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 13%, with no material changes in the coverage. These policies are in effect until August 1, 2009.
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 $200,000,000. 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
On July 25, 2008, we filed a complaint in the U.S. District Court, Eastern District of Virginia (Alexandria), against Tetra Tech, Inc. and Tetra Tech MM, Inc. (collectively, “Tetra Tech”) and Arthur Willden, a Tetra Tech employee during the relevant period and the brother of our former employee, James R. Willden. Our complaint alleges that portions of payments made by AvalonBay to Tetra Tech were improperly passed on by Tetra Tech to San Jose Water Conservation Corp. We previously obtained judgments against James Willden, San Jose Water Conservation Corp, and Michael Schroll, the President of San Jose Water Conservation Corp. Tetra Tech has filed a counterclaim and cross complaint against AvalonBay and others seeking damages in excess of $9 million. We believe that Tetra Tech’s counterclaim is without merit with respect to AvalonBay and intend to vigorously defend such claim. Our insurer, as subrogee, will have a claim to a portion of recoveries we collect, if any, from James Willden, San Jose Water Conservation Corp., Michael Schroll and/or Tetra Tech. There can be no assurance that any meaningful amount will be collected in recovery or that we will be successful in our litigation with Tetra Tech.
We are currently 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 filed a complaint against us on September 23, 2005 in the U.S. District Court, District of Maryland with respect to 100 properties. The lawsuit seeks monetary damages as well as injunctive relief, such as modifications to assets. The Company has filed a motion to dismiss all or parts of the suit, which has not been ruled on yet by the court. On August 13, 2008, the U.S. Attorney’s Office for the Southern District of New York filed a civil lawsuit against the

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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, and which we believe satisfies the requirements of the FHA. Due to the preliminary nature of the Equal Rights Center and Department of Justice matters, we cannot predict or determine the outcome of these matters, 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 recently sold this property 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 cannot predict the likely 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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the fourth quarter of 2008.

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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 2008 and 2007, as reported by the NYSE. On January 31, 2009 there were 669 holders of record of an aggregate of 79,745,531 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.
                                                 
    2008   2007
    Sales Price   Dividends   Sales Price   Dividends
    High   Low   declared   High   Low   declared
Quarter ended March 31
  $ 105.98     $ 79.78     $ 0.8925     $ 149.94     $ 125.30     $ 0.85  
 
Quarter ended June 30
  $ 107.37     $ 87.65     $ 0.8925     $ 134.62     $ 115.38     $ 0.85  
 
Quarter ended September 30
  $ 109.45     $ 82.97     $ 0.8925     $ 128.46     $ 105.91     $ 0.85  
 
Quarter ended December 31
  $ 96.68     $ 41.43     $ 2.70     $ 125.48     $ 88.97     $ 0.85  
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. See discussion in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” 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, as discussed in Note 7, “Real Estate Disposition Activities,” elsewhere in this report. The Special Dividend is intended 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 2009, we announced that our Board of Directors declared a dividend on our common stock for the first quarter of 2009 of $0.8925 per share. The dividend will be payable on April 15, 2009 to all common stockholders as of April 1, 2009.

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Issuer Purchases of Equity Securities
                                 
                    (c)   (d)
                    Total Number of   Maximum Dollar Amount
            (b)   Shares Purchased   that May Yet be Purchased
    (a)   Average Price   as Part of Publicly   Under the Plans or
    Total Number of   Paid per   Announced Plans   Programs
    Shares Purchased   Share   or Programs   (in thousands)
Period   (1)   (1)   (2)   (2)
Month Ended
    4,000,206     $ 25.00       —     $ 200,000  
October 31, 2008
                               
Month Ended
    —     $ —       —     $ 200,000  
November 30, 2008
                               
Month Ended
    —     $ —       —     $ 200,000  
December 31, 2008
                               
 
(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. Amounts for the month ended October 31, 2008 include the redemption of all 4,000,000 outstanding shares of the Company’s Series H Cumulative Redeemable Preferred Stock (“Preferred Stock”) that occurred on October 15, 2008. The redemption of the Preferred stock was not part of the Company’s publicly announced stock repurchase program.
 
(2)   As disclosed in our Form 10-Q for the quarter ended March 31, 2008, on February 6, 2008, we disclosed that our Board of Directors voted to further increase the authorized limit of our stock repurchase program to $500,000,000. All amounts presented in the table above include this further increase. In determining whether to repurchase shares, we consider a variety of factors, including our liquidity needs, the then current market price of our shares and the effect of the share repurchases on our per share earnings and FFO. 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 AvalonBay Communities, Inc. 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  
    12-31-08     12-31-07     12-31-06     12-31-05     12-31-04  
Revenue:
                                       
Rental and other income
  $ 847,640     $ 760,521     $ 671,382     $ 613,434     $ 561,752  
Management, development and other fees
    6,568       6,142       6,259       4,304       604  
 
                             
Total revenue
    854,208       766,663       677,641       617,738       562,356  
 
                             
 
                                       
Expenses:
                                       
Operating expenses, excluding property taxes
    258,162       231,688       206,059       187,824       178,229  
Property taxes
    77,267       70,562       62,651       60,535       54,435  
Interest expense, net
    114,878       94,540       106,271       122,787       127,123  
Depreciation expense
    194,150       168,324       149,352       146,225       139,436  
General and administrative expense
    42,781       28,494       24,767       25,761       18,074  
Impairment loss
    57,899       —       —       —       —  
 
                             
Total expenses
    745,137       593,608       549,100       543,132       517,297  
 
                             
 
                                       
Equity in income of unconsolidated entities
    4,566       59,169       7,455       7,198       1,100  
Venture partner interest in profit-sharing
    —       —       —       —       (1,178 )
Minority interest income (expense) in consolidated partnerships
    741       (1,585 )     (573 )     (1,481 )     (150 )
Gain on sale of land
    —       545       13,519       4,479       1,138  
 
                             
 
                                       
Income from continuing operations before cumulative effect of change in accounting principle
    114,378       231,184       148,942       84,802       45,969  
Discontinued operations:
                                       
Income from discontinued operations
    12,208       20,489       20,193       30,379       35,976  
Gain on sale of communities
    284,901       106,487       97,411       195,287       121,287  
 
                             
Total discontinued operations
    297,109       126,976       117,604       225,666       157,263  
 
                             
 
                                       
Income before cumulative effect of change in accounting principle
    411,487       358,160       266,546       310,468       203,232  
Cumulative effect of change in accounting principle
    —       —       —       —       4,547  
 
                             
Net income
    411,487       358,160       266,546       310,468       207,779  
Dividends attributable to preferred stock
    (10,454 )     (8,700 )     (8,700 )     (8,700 )     (8,700 )
 
                             
 
                                       
Net income available to common stockholders
  $ 401,033     $ 349,460     $ 257,846     $ 301,768     $ 199,079  
 
                             
Per Common Share and Share Information:
                                       
 
                                       
Earnings per common share — basic (3):
                                       
 
                                       
Income from continuing operations (net of dividends attributable to preferred stock)
  $ 1.35     $ 2.83     $ 1.89     $ 1.05     $ 0.58  
Discontinued operations
    3.87       1.61       1.59       3.09       2.20  
 
                             
Net income available to common stockholders
  $ 5.22     $ 4.44     $ 3.48     $ 4.14     $ 2.78  
 
                             
Weighted average common shares outstanding — basic
    76,783,515       78,680,043       74,125,795       72,952,492       71,564,202  
 
                                       
Earnings per common share — diluted (3):
                                       
Income from continuing operations (net of dividends attributable to preferred stock)
  $ 1.34     $ 2.79     $ 1.86     $ 1.03     $ 0.58  
Discontinued operations
    3.83       1.59       1.56       3.02       2.17  
 
                             
Net income available to common stockholders
  $ 5.17     $ 4.38     $ 3.42     $ 4.05     $ 2.75  
 
                             
Weighted average common shares outstanding — diluted (1)
    77,578,852       79,856,927       75,586,898       74,759,318       73,354,956  
 
Cash dividends declared (2)
  $ 3.57     $ 3.40     $ 3.12     $ 2 .84     $ 2.80  
 
(1)   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.
 
(2)   Does not include the special dividend of 1.8075, which was declared on December 17, 2008, and paid for by the Company using common stock par value $0.01.
 
(3)   Earnings per common share — basic and Earnings per common share — diluted include $0.06 per share related to the cumulative effect of a change in accounting principle.

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    For the year ended  
    12-31-08     12-31-07     12-31-06     12-31-05     12-31-04  
Other Information:
                                       
Net income
  $ 411,487     $ 358,160     $ 266,546     $ 310,468     $ 207,779  
Depreciation — continuing operations
    194,150       168,324       149,352       146,225       139,436  
Depreciation — discontinued operations
    5,302       13,401       14,777       17,072       24,464  
Interest expense, net — continuing operations
    114,878       94,540       106,271       122,787       127,123  
Interest expense, net — discontinued operations
    1,490       3,692       4,775       4,311       4,505  
 
                             
EBITDA (1)
  $ 727,307     $ 638,117     $ 541,721     $ 600,863     $ 503,307  
 
                             
 
                                       
Funds from Operations (2)
  $ 315,947     $ 368,057     $ 320,199     $ 271,096     $ 235,514  
Number of Current Communities (3)
    164       163       150       143       138  
Number of apartment homes
    45,728       45,932       43,141       41,412       40,142  
 
                                       
Balance Sheet Information:
                                       
Real estate, before accumulated depreciation
  $ 8,002,487     $ 7,556,740     $ 6,615,593     $ 5,940,146     $ 5,734,122  
Total assets
  $ 7,173,374     $ 6,736,484     $ 5,848,507     $ 5,198,598     $ 5,116,019  
Notes payable and unsecured credit facilities
  $ 3,674,457     $ 3,208,202     $ 2,866,433     $ 2,334,017     $ 2,451,354  
 
                                       
Cash Flow Information:
                                       
Net cash flows provided by operating activities
  $ 386,855     $ 454,874     $ 351,660     $ 306,248     $ 275,617  
Net cash flows used in investing activities
  $ (266,309 )   $ (809,247 )   $ (511,371 )   $ (19,761 )   $ (251,683 )
Net cash flows (used in) provided by financing activities
  $ (75,111 )   $ 366,360     $ 162,280     $ (282,293 )   $ (29,471 )
 
Notes to Selected Financial Data
 
(1)   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 generally accepted accounting principles, or “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.
 
(2)   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.
 
(3)   Current Communities consist of all communities other than those which are still under construction and have not received a certificate of occupancy.
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.

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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.
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  
    12-31-08     12-31-07     12-31-06     12-31-05     12-31-04  
Net income
  $ 411,487     $ 358,160     $ 266,546     $ 310,468     $ 207,779  
Dividends attributable to preferred stock
    (10,454 )     (8,700 )     (8,700 )     (8,700 )     (8,700 )
Depreciation — real estate assets, including discontinued operations and joint venture adjustments
    203,082       184,731       165,982       163,252       159,221  
Minority interest expense, including discontinued operations
    216       280       391       1,363       3,048  
Gain on sale of unconsolidated entities holding previously depreciated real estate assets
    (3,483 )     (59,927 )     (6,609 )     —       —  
Cumulative effect of change in accounting principle
    —       —       —       —       (4,547 )
Gain on sale of previously depreciated real estate assets
    (284,901 )     (106,487 )     (97,411 )     (195,287 )     (121,287 )
 
                             
Funds from Operations attributable to common stockholders
  $ 315,947     $ 368,057     $ 320,199     $ 271,096     $ 235,514  
 
                             
 
                                       
Weighted average common shares outstanding — diluted
    77,578,852       79,856,927       75,586,898       74,759,318       73,354,956  
 
FFO per common share — diluted
  $ 4.07     $ 4.61     $ 4.24     $ 3.63     $ 3.21  

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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 as described more fully under “Forward-Looking Statements” included in this report. Actual results or developments could differ materially from those projected in such statements as a result of 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 strategy is to penetrate these markets with a broad range of products and services and an intense focus on our customer. 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, 2008, net income available to common stockholders was $401,033,000 compared to $349,460,000 for 2007, an increase of 14.8%. The annual year-over-year increase is primarily attributable to an increase in gains from the sale of communities and joint venture real estate investments in 2008 as compared to 2007 and growth in income from existing and newly developed communities in 2008, partially offset by non-cash charges for land impairments, abandoned pursuit costs and other charges related to our reduction in our planned development activity and other items listed in the table below.

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    Net Income and EPS/FFO Decrease (Increase)  
    Full Year 2008  
    Amount     Per Share (1)  
Land impairments
  $ 57,899,000     $ 0.75  
Severance and related costs
    3,400,000       0.04  
Federal excise tax
    3,200,000       0.04  
Fund II organizational costs
    1,209,000       0.02  
Gain on medium term notes repurchase
    (1,839,000 )     (0.02 )
 
               
Preferred stock deferred offering expenses
    3,566,000       0.05  
Increase in abandoned pursuit costs
    5,537,000       0.07  
 
           
 
  $ 72,972,000     $ 0.94  
 
           
 
(1)   Per share amounts are computed using the weighted average common shares-diluted at December 31, 2008.
Apartment fundamentals, while in line with expectations, were challenged in the second half of 2008 as the recent economic downturn accelerated. We were able to achieve full year-over-year rental revenue growth of 3.1% for our Established Community portfolio, comprised entirely of an increase in rental rates of 3.1%, with no change in occupancy. This revenue growth, combined with constrained expense growth, contributed to our Established Community portfolio achieving year-over-year growth in net operating income (“NOI”) of 3.6% in 2008. However, due to the decline in market fundamentals during the fourth quarter of 2008, rental revenue from Established Communities increased 1.7% and NOI increased 2.4% over the prior year period.
We expect a decrease in Earnings per share — diluted (“EPS”) in 2009 from the prior year of approximately 50%, driven primarily by the decrease in expected dispositions for 2009. Contributing to these results will be an expected decline in the revenue and net operating income from our Established Communities in 2009. The recession, coupled with the short term nature of apartment leases, has adversely impacted current operating fundamentals. While certain apartment markets continue to exhibit positive trends, the negative impact on renter demand from net job losses is expected to result in year-over-year declines in NOI. We believe that the adverse impact of the recession will be somewhat offset by (i) the expected continued weakness in the for-sale housing market during 2009 and (ii) growth in those age groups that have historically demonstrated a higher propensity to rent. In addition, the level of new rental completions in the Company’s markets is anticipated to decline during 2009 from 2008 levels. Our current financial outlook for 2009 provides for a decline in rental revenue of between 1.5% and 3.5% in our Established Community portfolio and a projected NOI decline of 4.25% to 6.25%.
While current capital market conditions continue to adversely affect access to liquidity, we were able to demonstrate the benefits of the financial flexibility that comes with a largely unencumbered capital structure. During the year ended December 31, 2008, we raised in excess of $1,900,000,000 of capital through the issuance of secured and unsecured debt, sales of assets, and joint venture partner capital commitments. During 2008 we sourced approximately $1,200,000,000 in debt at attractive prices from a variety of sources, including the Government Sponsored Enterprises, tax-exempt debt, money center banks and even a local bank for long term secured debt. In addition, we achieved a record level of dispositions during 2008, selling eleven communities (including one held by the Fund) for an aggregate gross sales price of $646,200,000. We anticipate our level of disposition activity to be in the range of gross sales of $100,000,000 to $200,000,000 in 2009. However, our actual disposition activity may differ significantly and will depend on various factors including market and economic conditions in 2009.
We used the proceeds from both the debt financing activity and community dispositions to fund our development and redevelopment activities, reduce amounts drawn under our unsecured line of credit, repay secured and unsecured debt, prepay certain secured debt with higher interest costs and repurchase common stock. Capital needs result primarily from development expenditures, maturing debt and dividend requirements. Our committed capital is sufficient to complete the development underway and meet other liquidity uses. See the discussion under Liquidity and Capital Resources.
While we believe that our development activity will continue to create long-term value, we reduced our expected level of development in response to the general deterioration in real estate and capital market conditions, the general

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recessionary environment. As previously disclosed, we do not anticipate starting any new development during the first half of 2009. Development starts in the second half of 2009, if any, will be evaluated based on our assessment of economic and capital market conditions at that time. We do expect to increase redevelopment activity in 2009 for both wholly owned and Fund (as defined below) related assets. As a result of the reduction in our development activities, we incurred certain non-cash and other charges as discussed in the table above. During 2008 we completed 13 communities for an aggregate total capitalized cost of $1,044,300,000, while only starting six communities, which are expected to be completed for an estimated total capitalized cost of $491,000,000. During 2009, the Company expects to disburse approximately $650,000,000 related to the 14 communities under development at December 31, 2008 and expected acquisitions of land for future development. We expect approximately $100,000,000 of the projected 2009 disbursements will be funded from cash in escrow related to previously sourced tax-exempt debt.
Our 2009 financial plan anticipates a continuation of poor credit markets and constrained liquidity. However, 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 current development and redevelopment activities. 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 deferred maintenance and repositioning activities at attractive costs due to the continued decline in costs for construction materials and labor. During 2009, we expect to start 16 redevelopments of wholly owned communities, as well as five redevelopments of communities on behalf of the Fund, as defined below.
AvalonBay Value Added Fund, L.P. (the “Fund”) is a discretionary investment fund with nine institutional investors, including us. One of our wholly owned subsidiaries is the general partner of the Fund and has invested approximately $48,000,000 in the Fund, representing a 15.2% combined general partner and limited partner equity interest. The Fund was our principal vehicle for acquiring apartment communities through the close of its investment period in March 2008.
On September 2, 2008, we announced the formation of AvalonBay Value Added Fund II, L.P. (“Fund II”), a private, discretionary investment vehicle with commitments from four institutional investors including us totaling $333,000,000. We have committed $150,000,000 to Fund II, representing a 45% equity interest. At final closing, the aggregate investor commitments to Fund II and our commitment and percentage interest in Fund II may change. Fund II can employ leverage of up to 65%, allowing for a total investment capacity of approximately $950,000,000 and has a term of ten years plus two one-year extension options. Fund II will acquire and operate multifamily apartment communities primarily in our current markets with the objective of creating value through redevelopment, enhanced operations and/or improving market fundamentals. Fund II will serve as the exclusive vehicle through which we will acquire investments in apartment communities for a period of three years from the closing date or until 90% of its committed capital 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 its invested equity, asset management fees, property management fees and redevelopment fees. We will also receive a promoted interest if certain return thresholds are met. As of December 31, 2008, there has been no capital contributed to Fund II and Fund II has made no investments. In the fourth quarter of 2008, Fund II entered into a $75,000,000 unsecured credit facility, with an option to increase the facility up to $200,000,000, subject to certain lender requirements. The credit facility bears interest at LIBOR plus 2.50% per annum, and matures in December 2011, assuming the exercise of a one-year extension option. At December 31, 2008, there was $760,000 outstanding under the Fund II credit facility.
Communities Overview
Our real estate investments consist primarily of current operating apartment communities, communities in various stages of development (“Development Communities”) and Development Rights (i.e., land or options to purchase land held for development), as further described in Item 2 of this report. 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

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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, 2008, we owned or held a direct or indirect ownership interest in 178 apartment communities containing 50,292 apartment homes in ten states and the District of Columbia, of which 14 communities were under construction and nine communities were under reconstruction. Of these communities, 23 were owned by entities that were not consolidated for financial reporting purposes, including 19 owned by the Fund. In addition, we owned a direct or indirect ownership interest in Development Rights to develop an additional 27 communities that, if developed in the manner expected, will contain an estimated 7,304 apartment homes.

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Results of Operations
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 2008, 2007 and 2006 follows (dollars in thousands):
                                                                 
    2008     2007     $ Change     % Change     2007     2006     $ Change     % Change  
Revenue:
                                                               
Rental and other income
  $ 847,640     $ 760,521     $ 87,119       11.5 %   $ 760,521     $ 671,382     $ 89,139       13.3 %
Management, development and other fees
    6,568       6,142       426       6.9 %     6,142       6,259       (117 )     (1.9 %)
 
                                               
Total revenue
    854,208       766,663       87,545       11.4 %     766,663       677,641       89,022       13.1 %
 
                                               
 
                                                               
Expenses:
                                                               
Direct property operating expenses, excluding property taxes
    200,990       181,324       19,666       10.8 %     181,324       164,852       16,472       10.0 %
Property taxes
    77,267       70,562       6,705       9.5 %     70,562       62,651       7,911       12.6 %
 
                                               
Total community operating expenses
    278,257       251,886       26,371       10.5 %     251,886       227,503       24,383       10.7 %
 
                                               
 
                                                               
Corporate-level property management and other indirect operating expenses
    39,874       38,627       1,247       3.2 %     38,627       34,177       4,450       13.0 %
Investments and investment management
    17,298       11,737       5,561       47.4 %     11,737       7,030       4,707       67.0 %
Interest expense, net
    114,878       94,540       20,338       21.5 %     94,540       106,271       (11,731 )     (11.0 %)
Depreciation expense
    194,150       168,324       25,826       15.3 %     168,324       149,352       18,972       12.7 %
General and administrative expense
    42,781       28,494       14,287       50.1 %     28,494       24,767       3,727       15.0 %
Impairment loss
    57,899       —       57,899       N/A       —       —       —       —  
 
                                               
Total other expenses
    466,880       341,722       125,158       36.6 %     341,722       321,597       20,125       6.3 %
 
                                               
 
                                                               
Equity in income of unconsolidated entities
    4,566       59,169       (54,603 )     (92.3 %)     59,169       7,455       51,714       693.7 %
Minority interest income (expense) in consolidated partnerships
    741       (1,585 )     2,326       146.8 %     (1,585 )     (573 )     (1,012 )     (176.6 %)
Gain on sale of land
    —       545       (545 )     N/A       545       13,519       (12,974 )     (96.0 %)
 
                                               
 
                                                               
Income from continuing operations
    114,378       231,184       (116,806 )     (50.5 %)     231,184       148,942       82,242       55.2 %
 
Discontinued operations:
                                                               
Income from discontinued operations
    12,208       20,489       (8,281 )     (40.4 %)     20,489       20,193       296       1.5 %
Gain on sale of communities
    284,901       106,487       178,414       167.5 %     106,487       97,411       9,076       9.3 %
 
                                               
Total discontinued operations
    297,109       126,976       170,133       134.0 %     126,976       117,604       9,372       8.0 %
 
                                               
 
                                                               
Net income
    411,487       358,160       53,327       14.9 %     358,160       266,546       91,614       34.4 %
Dividends attributable to preferred stock
    (10,454 )     (8,700 )     (1,754 )     20.2 %     (8,700 )     (8,700 )     —       —  
 
                                               
Net income available to common stockholders
  $ 401,033     $ 349,460     $ 51,573       14.8 %   $ 349,460     $ 257,846     $ 91,614       35.5 %
 
                                               
Net income available to common stockholders increased $51,573,000 or 14.8%, to $401,033,000 in 2008 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. Net income available to common stockholders increased $91,614,000 or 35.5% in 2007 over the prior year period due primarily to sales of consolidated operating communities and investments in unconsolidated entities and related gains combined with growth in NOI from Established Communities and contributions to net operating income from newly developed communities.
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 U.S. generally accepted accounting principles (“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, 2008, 2007 and 2006 to net income for each year, are as follows (dollars in thousands):

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    For the year ended  
    12-31-08     12-31-07     12-31-06  
Net income
  $ 411,487     $ 358,160     $ 266,546  
Indirect operating expenses, net of corporate income
    33,045       31,285       28,811  
Investments and investment management
    17,298       11,737       7,030  
Interest expense, net
    114,878       94,540       106,271  
General and administrative expense
    42,781       28,494       24,767  
Equity in income of unconsolidated entities
    (4,566 )     (59,169 )     (7,455 )
Minority interest in consolidated partnerships
    (741 )     1,585       573  
Depreciation expense
    194,150       168,324       149,352  
Impairment loss
    57,899       —       —  
Gain on sale of real estate assets
    (284,901 )     (107,032 )     (110,930 )
Income from discontinued operations
    (12,208 )     (20,489 )     (20,193 )
 
                 
Net operating income
  $ 569,122     $ 507,435     $ 444,772  
 
                 
The NOI increases for both 2008 and 2007, as compared to the prior year period, consist of changes in the following categories (dollars in thousands):
                 
    2008     2007  
    Increase     Increase  
Established Communities
  $ 14,257     $ 27,665  
   
Other Stabilized Communities
    14,982       10,186  
   
Development and Redevelopment Communities
    32,448       24,812  
 
           
   
Total
  $ 61,687     $ 62,663  
 
           
The NOI increases in Established Communities in 2008 were largely due to continued favorable but moderating apartment market fundamentals. During 2008, we continued to focus on rental rate growth, while maintaining occupancy of at least 95% in all regions.
We anticipate that rental rates and occupancy levels will decline in 2009 such that overall rental revenue will decline between 1.5% and 3.5% as compared to the 3.1% growth achieved in 2008. The expected revenue decline is due to the general decline in overall economic conditions and related employment levels. 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 increase between 3.0% and 4.0% in 2009 from prior year levels, attributable primarily to increases in property taxes, utilities, insurance and office operations. As a result, we expect NOI for our Established Communities to decline between 4.25% and 6.25%. These projections are based on our outlook for economic conditions in 2009, both nationally and in the markets where 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.
Net operating income (“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.
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 decreased to 37,886 apartment homes for 2008 as compared to 38,436 homes for 2007 and 37,716 homes for 2006. This change is primarily the result of communities sold during 2008 containing 3,459 apartment homes, as well as declining occupancy levels due to the economic slow down, partially offset by increased homes available from newly developed communities,. The weighted average monthly revenue per occupied apartment home increased to $1,921 for 2008 as compared to $1,767 in 2007 and $1,610 in 2006.

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Established Communities — Rental revenue increased $18,221,000, or 3.1%, for 2008 and increased $34,257,000, or 5.5%, for 2007. These increases are due entirely to increased average rental rates. For 2008, the weighted average monthly revenue per occupied apartment home increased 3.1% to $1,928 compared to $1,870 in 2007, primarily due to increased market rents. There was no change in year-over-year average economic occupancy for 2008. 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 increases in Established Communities’ rental revenue in all six of our regions for 2008 as compared to the prior year period. The largest percentage increases in rental revenue were in the Northern California and Pacific Northwest regions, with increases of 5.9% and 5.2%, respectively, between years. Almost 70% of our Established Community revenue is generated by the Metro New York/New Jersey, Northern California and the New England regions, and are discussed in more detail below.
The Metro New York/New Jersey region, which accounted for approximately 23.8% of Established Community rental revenue for 2008, experienced an increase in rental revenue of 2.3% for 2008 as compared to 2007. Average rental rates increased 2.4% to $2,353, and economic occupancy decreased 0.1% to 96.2% for 2008 as compared to 2007. During 2008 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 occupancy levels in the second half of 2008. The challenges facing the financial services industry are expected to continue throughout 2009 resulting in a further decline in employment levels. We will remain focused on the current market conditions, as we seek to manage the resulting impact on our community operating results for 2009.
Northern California, which represented approximately 21.1% of Established Community rental revenue during 2008, experienced an increase in rental revenue of 5.9% as compared to 2007. Average rental rates increased by 6.2% to $1,943 and economic occupancy declined by 0.3% from 97.0% to 96.7% for 2008 as compared to 2007. We expect Northern California to see a modest decline in revenue in 2009.
The New England region accounted for approximately 21.0% of the Established Community rental revenue for 2008 and experienced rental revenue growth of 2.3% over the prior year. Average rental rates increased 2.2% to $2,053 and economic occupancy increased 0.1% to 96.3% for 2008, as compared to 2007. 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 continue to monitor the recent decline in job growth as compared to 2007 due to the current volatility in the financial services industry.
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 2008 and 2007 (dollars in thousands). Information for the year ended December 31, 2006 is not presented, as Established Community classification is not comparable prior to January 1, 2007. See Note 9, “Segment Reporting,” of our Consolidated Financial Statements.

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    For the year ended  
    12-31-08     12-31-07  
Rental revenue (GAAP basis)
  $ 605,657     $ 587,436  
Concessions amortized
    5,973       5,316  
Concessions granted
    (7,271 )     (5,469 )
 
           
 
               
Rental revenue adjusted to state concessions on a cash basis
  $ 604,359     $ 587,283  
 
           
 
               
Year-over-year % change — GAAP revenue
    3.1 %     n/a  
 
               
Year-over-year % change — cash concession based revenue
    2.9 %     n/a  
Management, development and other fees increased $426,000, or 6.9% in 2008 and decreased $117,000, or 1.9% in 2007. The increase in 2008 was due primarily to increased redevelopment fees and property management fees as additional communities were acquired by the Fund. The decrease in 2007 was due primarily to lower development and redevelopment management fees coupled with the disposition of our interest in a joint venture, partially offset by increased management fees from Fund communities.
Direct property operating expenses, excluding property taxes increased $19,666,000, or 10.8% in 2008 and increased $16,472,000, or 10.0% for 2007 as compared to the prior year periods, primarily due to the addition of recently developed apartment homes.
For Established Communities, direct property operating expenses, excluding property taxes, increased $521,000, or 0.4% to $133,459,000 for 2008 and $1,661,000, or 1.1% to $148,628,000 for 2007, due primarily to increased utilities, administrative and community maintenance related costs, offset partially by a decrease in insurance and payroll related expenses. The increases in administrative expense are primarily due to increases in bad debt, due to a general decline in the economic climate.
Property taxes increased $6,705,000, or 9.5% and $7,911,000, or 12.6% in 2008 and 2007, 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 $3,107,000, or 5.6% and $2,618,000, or 4.5% for 2008 and 2007, respectively due to both higher assessments throughout all regions and reductions in property taxes realized in 2007 that did not occur in 2008. 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 2009 to increase over 2008 due primarily to higher tax rates, without the benefit of lower assessed values. Property tax increases are limited by law (Proposition 13) for communities in California. We evaluate property tax increases internally, as well as engage third-party consultants, and appeal increases when appropriate.
Corporate-level property management and other indirect operating expenses increased by $1,247,000, or 3.2% in 2008 and $4,450,000, or 13.0% in 2007 over the prior year periods. These increases are due primarily to increased compensation and employee separation costs, as well as costs relating to corporate initiatives focused on increasing efficiency and enhancing controls at our operating communities. The 2008 expense includes transition and ongoing costs related to our Customer Care Center in Virginia Beach, Virginia that we opened in the third quarter of 2007 to centralize certain community-related accounting, administrative and customer service functions.
Investments and investment management reflects the costs incurred for investment acquisitions, investment management and abandoned pursuit costs, which include costs incurred for development pursuits not yet considered probable for development, as well as the abandonment of development pursuits, acquisition pursuits and disposition pursuits. Investments and investment management costs increased in 2008 and 2007 compared to the prior year periods due primarily to increases in abandoned pursuit costs. Abandoned pursuit costs were $12,511,000 in 2008, $6,974,000 in 2007 and $2,115,000 in 2006. The increase in abandoned pursuit costs in 2008 is due to the reduction in our planned development activity. These costs can be volatile,

47


 

particularly in periods of economic downturn or when there is limited access to capital, and the costs incurred in any given period may vary significantly in future periods.
Interest expense, net increased $20,338,000, or 21.5% and decreased $11,731,000, or 11.0% in 2008 and 2007, respectively. This category includes both interest expense and interest income. The increase in 2008 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 period. In addition, interest expense in 2008 was reduced by including the gain of $1,950,000 recognized by repurchasing $15,000,000 of our $250,000,000, 5.5% unsecured notes at a discount of 87% of par for $13,050,000. Interest expense also includes charges of approximately $410,000 related to unamortized deferred financing costs and purchase premiums for debt that was repaid prior to its scheduled maturity.
Depreciation expense increased in 2008 and 2007 primarily due to the completion of development and redevelopment activities.
General and administrative expense (“G&A”) increased $14,287,000, or 50.1% in 2008 and increased $3,727,000, or 15.0% in 2007 as compared to the prior year periods. The 2008 increase is due primarily to compensation, including severance and related costs associated with the decrease in our planned development activity, federal excise tax expense resulting from gains on our increased disposition activity during 2008 and organization costs for the formation of Fund II. The 2007 increase is primarily due to increased compensation costs.
Impairment loss for 2008 is due primarily to the write down of eight land parcels which we have decided to not develop. We did not recognize an impairment loss in either 2007 or 2006.
Equity in income of unconsolidated entities for 2008 decreased from the prior year period 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. The increase in 2007 over the prior year period is due primarily to approximately $60,000,000 in gains from the dispositions of two investments in 2007.
Minority interest in consolidated partnerships for 2008 resulted in income of $741,000, compared to expense of $1,585,000 in 2007 due to recognition of income for our joint venture partners’ portion of the net loss incurred by Fund II, as well as the conversion and redemption of limited partnership units in 2007 and 2008, thereby reducing outside ownership interests and the allocation of net income to outside ownership interests. The increase in 2007 over the prior year period is due primarily to the recognition in 2007 of the sale of a 70% joint venture partner interest in one of our unconsolidated communities, partially offset by the redemption of limited partnership units, as discussed above.
Gain on sale of land for 2008 decreased from the prior year period due to the absence of land sales in 2008. Gain on sale of land from 2007 decreased from 2006 due to the volume and size of parcels sold each year.
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, 2008. This income decreased for 2008 and 2007 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 increased in 2008 and 2007 as compared to the prior year periods as a result of a higher volume of sales 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.

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Funds from Operations Attributable to Common Stockholders (“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 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
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. 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 maturity payments;
 
  •   normal recurring operating expenses;
 
  •   DownREIT partnership unit distributions; and
 
  •   capital calls for the Fund and Fund II, as required.
The capital and credit markets contracted significantly during 2008, resulting in a constrained liquidity environment. Although general market liquidity was constrained, we were able to satisfy our liquidity needs from a combination of cash flows provided by secured and unsecured financings, proceeds from asset sales and cash from operations. In 2009, we continue to expect to meet all of our liquidity needs from a variety of internal and external sources, including 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, 2008, we have unrestricted cash and cash in escrow of $259,305,000 available for development activities. For the year ended December 31, 2008 we raised in excess of $1,900,000,000 of capital through the issuance of secured debt and unsecured debt, equity commitments from private equity sources and sales of assets. We used these proceeds to fund our development and redevelopment activities, reduce amounts drawn under our unsecured line of credit, repay secured and unsecured debt, prepay certain unsecured debt with interest costs above prevailing rates and repurchase our common and preferred stock.
Unrestricted cash and cash equivalents totaled $65,706,000 at December 31, 2008, an increase of $45,435,000 from $20,271,000 at December 31, 2007. The following discussion relates to changes in cash due to operating, investing

49


 

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 $386,855,000 in 2008 from $454,874,000 in 2007. The decrease was driven primarily by the payment of interest amounts and the timing of general corporate payables, partially offset by the additional NOI from our Established Communities, as well as NOI from recently developed communities.
Investing Activities — Net cash used in investing activities of $266,309,000 in 2008 related to investments in assets through the development and redevelopment of apartment communities, partially offset by the gross proceeds from the disposition of communities in the amount of $529,777,000 and an increase in construction escrows of $126,611,000. During 2008, we invested $902,327,000 in the purchase and development of the following real estate and capital expenditures:
  •   We acquired six parcels of land in connection with Development Rights, for a purchase price of approximately $97,174,000.
 
  •   We had capital expenditures of $20,824,000 for real estate and non-real estate assets.
 
  •   We invested approximately $881,503,000 in the development of communities, including the commencement of the development of six communities which are expected to contain an aggregate of 1,768 apartment homes for an expected aggregate total capitalized cost of $491,000,000.
Financing Activities — Net cash used by financing activities totaled $75,111,000 in 2008. The net cash used is due primarily to the payment of cash dividends in the amount of $278,795,000, the redemption of preferred stock for $100,000,000 and the repurchase of 482,100 shares of our common stock at an average price of $87.42 per share, offset somewhat by the net issuance of secured and unsecured debt of $350,054,000, including amounts repaid under our Credit Facility (as defined below).
In February 2008, our Board of Directors authorized an increase of $200,000,000 in our common stock repurchase program, increasing the total amount the Company can acquire to $500,000,000, of which approximately $300,000,000 has been used to repurchase our common stock as of December 31, 2008. The decision to use the additional share repurchase authorization will depend on current capital market conditions and liquidity, our share price relative to the net asset value per share and other uses of capital, including development.
In October 2008, we exercised our option to redeem all 4,000,000 outstanding shares of our 8.70% Series H Cumulative Redeemable Preferred Stock for $100,701,000. The repayment amount includes the redemption value of the outstanding shares of $25 per share and accrued but unpaid dividends through the redemption date. We recorded a non-cash charge for deferred offering expenses of approximately $3,566,000 in the fourth quarter of 2008 related to this redemption.
Variable Rate Unsecured Credit Facility
We currently have a $1,000,000,000 revolving variable rate unsecured credit facility (the “Credit Facility”) with a syndicate of commercial banks that expires in November 2011 (assuming our exercise of a one-year renewal option). In the aggregate, 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 (0.85% on January 31, 2009). 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 $422,500,000. 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, 2009. At January 31, 2009, $335,000,000 was outstanding on the Credit Facility, $45,415,000 was used to provide letters of credit, and $619,585,000 was available for borrowing under the Credit Facility.
We are subject to certain customary financial and other covenants under the Credit Facility, our $330,000,000 variable rate, unsecured term loan and the indenture under which our unsecured notes were issued. The financial covenants include the following:
  •   limitation 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 are in compliance with these covenants at December 31, 2008.

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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, we anticipate that no significant portion of the principal of these notes will be repaid substantially prior to maturity. 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 2008:
  •   we repaid $50,000,000, 6.625% principal amount of previously issued unsecured notes, along with any unpaid interest, pursuant to their scheduled maturity;
 
  •   we redeemed $10,000,000 principal amount of our $150,000,000, 7.5% unsecured notes that mature in August 2009 for $10,287,500 with the premium above par recorded as a charge to earnings;
 
  •   we repaid $146,000,000 of unsecured notes with an annual interest rate of 8.25% pursuant to their scheduled maturity;
 
  •   we redeemed $15,000,000 principal amount of our $250,000,000, 5.5% unsecured notes that mature in January 2012 at a discount price of 87% of par;
 
  •   we repaid the loans secured by Avalon Knoll, which is located in Germantown, Maryland and had a fixed rate of 6.95%, Avalon Landing, which is located in Annapolis, Maryland and had a fixed rate of 6.85%, and Avalon at Fairway Hills, which is located in Columbia, Maryland and had a variable rate. These loans, which had contractual maturities of 2026 and an aggregate amount outstanding of $28,707,000, were repaid early at par;
 
  •   we repaid the $4,368,000, 6.99% fixed rate loan secured by a development right in Wheaton, Maryland pursuant to its scheduled maturity;
 
  •   we borrowed $170,125,000 under an interest-only mortgage note secured by Avalon at Arlington Square, located in Arlington, Virginia at an effective rate of 4.69% for five years;
 
  •   we borrowed $94,572,000 under an interest-only mortgage note secured by Avalon at Cameron Court, located in Alexandria, Virginia at an effective rate of 4.95% for five years;
 
  •   we borrowed $110,600,000 under an interest-only mortgage note secured by Avalon Crescent, located in McLean, Virginia at an effective rate of 5.48% for seven years;
 
  •   we borrowed $150,000,000 under an interest-only mortgage note secured by Avalon Silicon Valley, located in Sunnyvale, California at an effective rate of 5.66% for seven years;
 
  •   we entered into a $330,000,000, variable rate unsecured term loan comprised of three tranches bearing interest at LIBOR plus a spread of 1.25%, of which approximately one third matures in each of the next three years beginning in 2009;
 
  •   we closed both a variable rate bond financing relating to Avalon Walnut Creek in the aggregate amount of $135,000,000, of which $126,000,000 is tax-exempt, as well as an associated 4.0% fixed-rate construction loan of $2,500,000;
 
  •   we closed a $62,400,000, 6.02% fixed rate loan secured by Avalon at Greyrock Place, located in Stamford, Connecticut;
 
  •   we closed a $51,749,000, 6.12% fixed rate loan secured by Avalon Darien, located in Darien, Connecticut;
 
  •   we closed a $55,100,000, 5.875% fixed rate loan secured by Avalon Commons, located in Smithtown, New York;
 
  •   we repaid $390,500,000 outstanding under our Credit Facility;
 
  •   we repurchased 482,100 shares of our common stock at an average price of $87.42 per share, for a total approximate purchase price of $42,144,000;
 
  •   we redeemed 44,592 limited partnership units in certain DownREITs for $1,756,000; and

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  •   we exercised our option to redeem all 4,000,000 outstanding shares of our 8.70% Series H Cumulative Redeemable Preferred Stock for $100,701,000, inclusive of accrued but unpaid dividends through the redemption date.
In January 2009, we made a cash tender offer for any and all of our 7.5% unsecured notes due August 2009 and December 2010. We purchased $37,438,000 of our $150,000,000, 7.5% unsecured notes due August 2009 at par. In addition, we purchased $64,423,000 of our $200,000,000, 7.5% unsecured notes due December 2010 at a discount price of 98% of par, for approximately $63,135,000, representing a yield to maturity of 8.66%. A gain of approximately $1,062,000 will be recorded in the first quarter of 2009 in conjunction with the purchase of the unsecured notes due December 2010. All of the notes purchased in the tender offer were cancelled. We previously acquired and cancelled an aggregate of $10,000,000 of the 7.5% unsecured notes due in August 2009.
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, 2008 (dollars in thousands).

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    All-In     Principal                                          
    interest     maturity     Balance outstanding                     Scheduled maturities              
Community   rate (1)     date     12-31-07     12-31-08     2009     2010     2011     2012     2013     Thereafter  
Tax-exempt bonds
                                                                               
Fixed rate
                                                                               
CountryBrook
    6.30 %   Mar-2012   $ 15,356     $ 14,680     $ 719     $ 766     $ 816     $ 12,379     $ —     $ —  
Avalon at Symphony Glen
    4.90 %   Jul-2024     9,780       9,780       —       —       —       —       —       9,780  
Avalon at Lexington
    6.55 %   Feb-2025     12,078       11,665       439       466       495       526       559       9,180  
Avalon Campbell
    6.48 %   Jun-2025     31,877       30,914  (2)     —       —       —       —       —       30,914  
Avalon Pacifica
    6.48 %   Jun-2025     14,460       14,023  (2)     —       —       —       —       —       14,023  
Avalon Knoll
    6.95 %   Jun-2026     11,654       —       —       —       —       —       —       —  
Avalon Fields
    7.55 %   May-2027     10,224       9,988       275       295       316       339       364       8,399  
Avalon Oaks
    7.45 %   Jul-2041     17,077       16,940       147       157       168       180       193       16,095  
Avalon Oaks West
    7.48 %   Apr-2043     16,919       16,795       133       142       152       162       173       16,033  
Avalon at Chestnut Hill
    5.82 %   Oct-2047     42,149       41,834       331       349       368       388       409       39,989  
 
                                                           
 
                    181,574       166,619       2,044       2,175       2,315       13,974       1,698       144,413  
Variable rate (3)
                                                                               
The Promenade
    2.55 %   Oct-2010     30,844       30,142       754       29,388       —       —       —       —  
Waterford
    1.52 %   Jul-2014     33,100       33,100  (4)     —       —       —       —       —       33,100  
Avalon at Mountain View
    1.42 %   Feb-2017     18,300       18,300  (4)     —       —       —       —       —       18,300  
Avalon at Mission Viejo
    1.59 %   Jun-2025     7,635       7,635  (4)     —       —       —       —       —       7,635  
Avalon at Nob Hill
    5.20 %   Jun-2025     20,800       20,800  (4)     —       —       —       —       —       20,800  
Avalon Campbell
    0.87 %   Jun-2025     6,923       7,886  (2)     —       —       —       —       —       7,886  
Avalon Pacifica
    0.87 %   Jun-2025     3,140       3,577  (2)     —       —       —       —       —       3,577  
Avalon at Fairway Hills I
    0.00 %   Jun-2026     11,500       —       —       —       —       —       —       —  
Avalon Bowery Place I
    2.12 %   Nov-2037     93,800       93,800  (5)     —       —       —       —       —       93,800  
Avalon Bowery Place II
    2.07 %   Nov-2039     48,500       48,500  (5)     —       —       —       —       —       48,500  
Avalon Acton
    1.77 %   Jul-2040     45,000       45,000  (5)     —       —       —       —       —       45,000  
Avalon Morningside Park
    1.65 %   Nov-2040     100,000       100,000  (5)     —       —       —       —       —       100,000  
Avalon Walnut Creek
    3.38 %   Mar-2046     —       116,000  (5)     —       —       —       —       —       116,000  
Avalon Walnut Creek
    3.14 %   Mar-2046     —       10,000  (5)     —       —       —       —       —       10,000  
 
                                                           
 
                    419,542       534,740       754       29,388       —       —       —       504,598  
Conventional loans (6)
                                                                               
Fixed rate
                                                                               
$50 million unsecured notes
    6.63 %   Jan-2008     50,000       —       —       —       —       —       —       —  
$150 million unsecured notes
    8.38 %   Jul-2008     146,000       —       —       —       —       —       —       —  
$150 million unsecured notes
    7.63 %   Aug-2009     150,000       140,000  (7)     140,000       —       —       —       —       —  
$200 million unsecured notes
    7.66 %   Dec-2010     200,000       200,000  (8)     —       200,000       —       —       —       —  
$300 million unsecured notes
    6.79 %   Sep-2011     300,000       300,000       —       —       300,000       —       —       —  
$50 million unsecured notes
    6.31 %   Sep-2011     50,000       50,000       —       —       50,000       —       —       —  
$250 million unsecured notes
    5.73 %   Jan-2012     250,000       235,000  (9)     —       —       —       235,000       —       —  
$250 million unsecured notes
    6.26 %   Nov-2012     250,000       250,000       —       —       —       250,000       —       —  
$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  
Wheaton Development Right
    6.99 %   Oct-2008     4,432       —       —       —       —       —       —       —  
4600 Eisenhower Avenue
    8.08 %   Apr-2009     4,293       4,175       4,175       —       —       —       —       —  
Avalon at Twinbrook
    7.25 %   Oct-2011     8,007       7,801       223       239       7,339       —       —       —  
Avalon at Tysons West
    5.55 %   Jul-2028     6,381       6,218       173       183       193       204       216       5,249  
Avalon Orchards
    7.65 %   Jul-2033     19,612       19,322       311       333       357       382       409       17,530  
Avalon at Arlington Square
    4.69 %   Apr-2013     —       170,125       —       —       —       —       170,125       —  
Avalon at Cameron Court
    4.95 %   Apr-2013     —       94,572       —       —       —       —       94,572       —  
Avalon Crescent
    5.48 %   May-2015     —       110,600       —       —       —       —       —       110,600  
Avalon Silicon Valley
    5.66 %   Jul-2015     —       150,000       —       —       —       —       —       150,000  
Avalon Darien
    6.12 %   Nov-2015     —       51,749       —       —       —       —       —       51,749  
Avalon Greyrock Place
    6.02 %   Nov-2015     —       62,400       —       —       —       —       —       62,400  
Avalon Commons
    5.88 %   Dec-2013     —       55,100       —       —       —       —       55,100       —  
Avalon Walnut Creek
    4.00 %   Jul-2066     —       2,500       —       —       —       —       —       2,500  
 
                                                           
 
                    1,938,725       2,409,562       144,882       200,755       357,889       485,586       420,422       800,028  
Variable rate (3)
                                                                               
Avalon at Flanders Hill
    4.06 %   May-2009     20,510       19,735  (4)     19,735       —       —       —       —       —  
Avalon at Newton Highlands
    4.18 %   Dec-2009     36,335       34,945  (4)     34,945       —       —       —       —       —  
Avalon at Crane Brook
    5.09 %   Mar-2011     32,560       31,530  (4)     1,106       1,169       29,255       —       —       —  
Avalon at Bedford Center
    4.10 %   May-2012     16,816       16,361  (4)     497       527       560       14,777       —       —  
Avalon Walnut Creek
    3.59 %   Mar-2046     —       9,000  (5)     —       —       —       —       —       9,000  
$105.6 million unsecured notes
    2.96 %   May-2009     —       105,600       105,600       —       —       —       —       —  
$112.2 million unsecured notes
    2.96 %   Jan-2010     —       112,200       —       112,200       —       —       —       —  
$112.2 million unsecured notes
    2.96 %   Jan-2011     —       112,200       —       —       112,200       —       —       —  
 
                                                           
 
                    106,221       441,571       161,883       113,896       142,015       14,777       —       9,000  
 
                                                                               
Total indebtedness — excluding unsecured credit facility           $ 2,646,062       $3,552,492     $ 309,563     $ 346,214     $ 502,219     $ 514,337     $ 422,120     $ 1,458,039  
 
                                                           
 
(1)   Includes credit enhancement fees, facility fees, trustees’ fees and other fees.
 
(2)   Financed by variable rate, tax-exempt debt, but the interest rate on a portion of this debt is effectively fixed at December 31, 2008 and December 31, 2007 through a swap agreement. The portion of the debt fixed through a 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, 2008.
 
(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, 2008. Actual amounts drawn on the debt as of December 31, 2008 are $93,279 for Bowery Place I, $44,678 for Bowery Place II, $44,148 for Avalon Acton, $78,505 for Morningside Park, and $0 for Walnut Creek.
 
(6)   Balances outstanding represent total amounts due at maturity, and are not net of $2,035 of debt discount as of December 31, 2008 and $2,501 of debt discount as of December 31, 2007, as reflected in unsecured notes on our Consolidated Balance Sheets included elsewhere in this report.

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(7)   In April 2008, we redeemed $10,000 aggregate principal amount of our $150,000, 7.5% unsecured notes due in August 2009. In January 2009, we redeemed $37,438 principal amount of our $150,000, 7.5% unsecured notes due August 2009.
 
(8)   In January 2009, we redeemed $64,423 principal amount of our $200,000, 7.5% unsecured notes due December 2010.
 
(9)   In November 2008, we redeemed $15,000 aggregate principal amount of our $250,000, 5.5% unsecured notes due January 2012.
Future Financing and Capital Needs — Dividend Requirements
As a REIT, we are subject to certain dividend distribution requirements in relation to taxable income to avoid paying federal income and federal excise taxes at the corporate level. During 2008, we sold 11 communities including one community sold by the Fund. Absent a special distribution in excess of our normal, recurring quarterly dividend, we would have had taxable income in excess of distributions resulting in federal income tax at the corporate level. To qualify for the dividends paid deduction for tax purposes and minimize this potential tax, in December 2008 we declared a combined special and regular dividend (the “Combined Dividend”) of $2.70 per share, comprised of a special dividend of $1.8075 (the “Special Dividend”) per share and our regular dividend of $0.8925 per share. The Company recorded a charge of $3,200,000 related to the expected federal excise taxes related to the gains on sale recognized during 2008.
Future Financing and Capital Needs — Portfolio and Other Activity
As of December 31, 2008, we had 14 new communities under construction, for which a total estimated cost of $666,623,000 remained to be invested. In addition, we had nine communities which we own, or in which we have a direct or indirect interest, under reconstruction, for which a total estimated cost of $53,214,000 remained to be invested. Substantially all of the capital expenditures necessary to complete the communities currently under construction and reconstruction, as well as development costs related to pursuing Development Rights, will be funded from:
  •   cash currently on hand 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 Fund or Fund II as discussed below, 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.
On September 2, 2008, we announced the formation of Fund II, a private, discretionary investment vehicle with commitments from us and four institutional investors. Fund II has equity commitments totaling $333,000,000. We have committed $150,000,000 to the Fund, representing a 45% equity interest. Fund II will acquire and operate multifamily apartment communities primarily in our current markets with the objective of creating value through redevelopment, enhanced operations and/or improving market fundamentals. Fund II will serve as the exclusive vehicle through which we will acquire investments in apartment communities until 2011, or earlier when 90% of its committed capital 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 our invested equity, asset management fees, property

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management fees and redevelopment fees. We will also receive a promoted interest if certain return thresholds are met. As of January 31, 2009, there have been no capital contributions to Fund II, and Fund II has not made any investments. In the fourth quarter of 2008, Fund II entered into a $75,000,000 unsecured credit facility, with an option to increase the facility up to $200,000,000, subject to certain lender requirements. The credit facility bears interest at LIBOR plus 2.50% per annum, and matures in December 2011, assuming the exercise of a one-year extension option. At December 31, 2008, there was $760,000 outstanding under the Fund II credit facility.
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 and will continue to be 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 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 the 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) overall once tenant improvements related to a retail tenant are complete, which is expected in 2009. 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, 2008 were not significant. As a result we have not recorded any obligation associated with these guarantees at December 31, 2008.
 
  •   The Fund has 22 loans secured by individual assets with amounts outstanding in the aggregate of $436,698,000. These mortgage loans have 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 Fund has two credit facilities that mature in December 2008. The Fund had $3,000,000 outstanding as of December 31, 2008 under its credit facilities. The mortgage loans and the credit facility are payable by the Fund with operating cash flow or disposition proceeds from the underlying real estate, and the credit facility is secured by capital commitments. We have not guaranteed the debt of the Fund, nor do we have any obligation to fund this debt should the Fund be unable to do so.
      In addition, as part of the formation of the Fund, we have provided to one of the limited partners a guarantee. The guarantee provides that if, upon final liquidation of the Fund, the total amount of all distributions to that partner during the life of the Fund (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

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      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 $7,192,000 as of December 31, 2008). As of December 31, 2008, the expected realizable value of the real estate assets owned by the Fund is considered adequate to cover such potential payment to that partner under the expected Fund liquidation scenario. The estimated fair value of, and our obligation under this guarantee, both at inception and as of December 31, 2008 was not significant and therefore we have not recorded any obligation for this guarantee as of December 31, 2008.
  •   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 $40,763,000. The variable-rate loan had an interest rate of 3.40% at December 31, 2008. 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 64 for-sale town homes in Danvers, Massachusetts. The LLC has two separate variable rate loans with aggregate borrowings of $4,476,000 and an interest rate of 2.875% at December 31, 2008. In addition, Aria at Hathorne has a short-term variable rate note for approximately $263,000 at an interest rate of 3.7% due in 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, is constructing a public garage adjacent to our Walnut Creek development. As part of the construction management services we provide to PHVP I, LLC for the construction of the public garage, we have provided a construction completion guarantee to the related lender in order to fulfill their standard financing requirements related to the garage construction financing. Our obligations under this guarantee terminate upon (i) the issuance of a certificate of substantial completion and (ii) completion of a list of lender requirements. The certificate of substantial completion was issued on July 11, 2008 and the completion of the lender’s requirements list is nearing completion. We expect termination of the guarantee in the first half of 2009.
 
  •   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 will close 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, 2008, we have an outstanding commitment to purchase the remaining land for approximately $62,519,000.
     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
We currently have contractual obligations consisting primarily of long-term debt obligations and lease obligations for certain land parcels and regional and administrative office space. During the third quarter of 2008, we entered into an operating land lease agreement relating to our Avalon Walnut Creek community currently under development. Aside from this lease, there have not been any other material changes outside the ordinary course of business to our contractual obligations during 2008. Scheduled contractual obligations required for the next five years and thereafter are as follows as of December 31, 2008 (dollars in thousands):

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    Payments due by period  
            Less than 1                     More than 5  
    Total     Year     1-3 Years     3-5 Years     Years  
Debt Obligations (1)
  $ 3,676,492     $ 433,563     $ 848,433     $ 936,457     $ 1,458,039  
   
Operating Lease Obligations (2)
    2,316,449       16,262       32,777       32,914       2,234,496  
 
                             
   
Total
  $ 5,992,941     $ 449,825     $ 881,210     $ 969,371     $ 3,692,535  
 
                             
 
(1)   Includes $124,000 outstanding under our variable rate Credit Facility as of December 31, 2008. The table of contractual obligations assumes repayment of this amount in 2009 — See “Liquidity and Capital Resources.” Amounts exclude interest payable as of December 31, 2008.
 
(2)   Includes land leases expiring between November 2028 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 NY/NJ 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. You should not rely on

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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. You should carefully review the discussion under Item 1a., “Risk Factors,” in this document for a discussion of risks associated with forward-looking statements.
In addition, these 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.
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 the Fund, 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 Significant Accounting Policies” 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 guidance of FIN 46(R), “Consolidation of Variable Interest Entities” (as revised) and

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Emerging Issues Task Force Issue No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights.” For investment interests that we do not consolidate, we look to the guidance in AICPA Statement of Position 78-9, “Accounting for Investments in Real Estate Ventures,” Accounting Principles Board Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock,” and Emerging Issues Task Force Topic D-46, “Accounting for Limited Partnership Investments,” to determine the accounting framework to apply. The application of these 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, 2008, our assets would have increased by $953,524,000 and our liabilities would have increased by $723,395,000. 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 under FIN 46(R), 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 and those 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 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 2008 our development activities decreased by 10%, and there were no corresponding decrease in our indirect project costs, our operating expenses would have increased by $3,034,000.
We capitalize pre-development costs incurred in pursuit of Development Rights for which we currently believe future development is probable. 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 in the pursuit of

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Development Rights 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 acquisition or development of an apartment community, and therefore should be capitalized, the accounting for pursuit costs is a critical accounting estimate. If it were determined that 10% of our capitalized pursuits were no longer probable of occurring, net income for the year ended December 31, 2008 would have decreased by $5,737,000.
Asset Impairment Evaluation
We apply the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”) for our consolidated operating apartment communities, Development Communities and Development Rights to determine the need for performing impairment analyses, as well as to measure the loss if an impairment has occurred on a regular basis, considering qualitative economic factors. We also apply the provisions of SFAS 144 for assessing the need to perform an impairment analysis and measuring impairment losses on the underlying long-lived assets held by our unconsolidated joint venture investments. In addition, we apply the provisions of APB No. 18, “The Equity Method of Accounting for Investments in Common Stock” (“APB 18”), to determine if there has been an other than temporary decline in the value of our investments in our unconsolidated joint ventures. Because each asset is unique, requiring significant management judgment, we believe that the asset impairment evaluation under SFAS 144, and the assessment of other than temporary declines in fair value under APB 18, are critical accounting estimates.
For both analyses, management judgment is required both to determine if a significant event has occurred, such that an impairment analysis is necessary, as well as for the assessment and measurement of any potential impairment. Under APB 18, in the event that there has been a loss in value for an investment, a loss is only recognized if it is other than temporary which requires management judgment.
To perform the SFAS 144 impairment analysis, we must estimate the undiscounted future cash flows associated with the asset, which in the case of an apartment community would be the cash flows from operations and any potential disposition proceeds for a given asset. Forecasting cash flows requires assumptions about such variables as the estimated holding period, rental rates, occupancy and operating expenses during the holding period, as well as disposition proceeds. In addition, when an impairment has occurred, we must estimate the discount factor, or market capitalization rate, to apply to the undiscounted cash flows to derive the fair value of the position. The market capitalization rate is influenced by many factors, including national and local economic conditions, as well as the location and quality of the asset.
Our analysis of investments in unconsolidated joint ventures under APB 18 considers our ability to recover the carrying amount of our investment by evaluating the current fair value of the net assets underlying the investment using our estimate of the forecasted cash flows that the asset will generate, including any incremental cash flows from investment management or other fees related to the investment, disposition proceeds and an estimated market capitalization rate. Our estimate of the fees considers various factors, including any contractually guaranteed amounts and expected periods over which the fees will be earned. In the event that the current fair value of our investment, considering the above factors, is less than our current carrying basis, an impairment exists. We must then determine if the impairment is other than temporary. Whether an impairment is other than temporary is a subjective determination, primarily considering the ability of the joint venture entity to generate cash flows from operations, the expected proceeds from the disposition of our position, and whether our expected investment horizon is adequate to recover any unrealized loss in the fair value of our investment.
Changes in the future cash flows associated with an asset have a direct, linear relationship to the fair value of the position. For example, holding all other variables constant, if there is a 10% decline in the estimated cash flows from operations for a community, there would be a corresponding decrease in the fair value of that asset of 10%. Changes in the market capitalization rate have an inverse relationship with the fair value of an asset, with a decrease in the market capitalization rate resulting in an increase in the fair value of the asset. For example, an asset that is valued at $80,000,000 when using a five percent market capitalization rate will increase in value to $100,000,000 if the market capitalization rate decreases by one

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percent to four percent, and to $133,000,000 if the market capitalization rate decreases by two percent, to a three percent market capitalization rate.
For the year ended December 31, 2008, we recognized an impairment loss of $57,899,000 associated with certain land parcels which we no longer intend to develop. At December 31, 2008 we determined that none of our consolidated operating communities, Development Communities, or investments in unconsolidated joint ventures were impaired under the provisions of SFAS 144, or APB 18, as appropriate. These conclusions were based on the factors that existed as of December 31, 2008. Given the recent deterioration in real estate and capital market conditions, 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 Internal Revenue Code of 1986 (“the Code”), as amended, 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 2008, our net income would have decreased by approximately $210,500,000.
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 certain financial market risks, the most predominant being interest rate risk. We monitor interest rate risk as an integral part of our overall risk management, which recognizes the unpredictability of financial markets and seeks to reduce the potentially adverse effect on our results of operations. 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. The specific market risks and the potential impact on our operating results are described below.
Our operating results are affected by changes in interest rates as a result of borrowings under our variable rate Credit Facility and outstanding bonds with variable interest rates, primarily associated with short-term interest rates such as LIBOR. We had $1,088,848,000 and $1,084,653,000 in variable rate debt outstanding (excluding variable rate debt effectively fixed through swap agreements) as of December 31, 2008 and 2007, respectively. If interest rates on the variable rate debt had been 100 basis points higher throughout 2008 and 2007, our annual interest costs would have increased by approximately $11,490,000 and $6,417,000, respectively, based on balances outstanding during the applicable years.
We currently use interest rate protection agreements (consisting of interest rate swap and interest rate cap agreements) to reduce the impact of interest rate fluctuations on certain variable rate indebtedness, not for trading or speculative purposes. Under swap agreements:

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  •   we agree to pay to a counterparty the interest that would have been incurred on a fixed principal amount at a fixed interest rate (generally, the interest rate on a particular treasury bond on the date the agreement is entered into, plus a fixed increment); and
 
  •   the counterparty agrees to pay to us the interest that would have been incurred on the same principal amount at an assumed floating interest rate tied to a particular market index.
As of December 31, 2008, the effect of interest rate swap agreements is to fix the interest rate on approximately $44,937,000 of our variable rate, tax-exempt debt. The interest rate protection provided by certain swap agreements on the consolidated variable rate, tax-exempt debt was not electively entered into by us but, rather, was a requirement of either the bond issuer or the credit enhancement provider related to certain tax-exempt bond financings. Had these swap agreements not been in place during 2008 and 2007, our annual interest costs would have been approximately $1,451,000 and $931,000 lower, respectively, based on balances outstanding and reported interest rates during the applicable years. Additionally, if the variable interest rates on this debt had been 100 basis points higher throughout 2008 and 2007 and these swap agreements had not been in place, our annual interest costs would have been approximately $887,000 and $248,000 lower, respectively.
Because the counterparties providing the swap agreements are major financial institutions which have an A+ or better credit rating by the Standard & Poor’s Ratings Group and the interest rates fixed by the swap agreements are significantly higher than current market rates for such agreements, 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 variable rate credit facility) with an aggregate carrying value of $3,552,492,000 at December 31, 2008 had an estimated aggregate fair value of $3,569,817,000 at December 31, 2008. Fixed rate debt (excluding our variable rate debt effectively fixed through swap agreements) represented $2,531,244,000 of the carrying value and $2,548,569,000 of the fair value at December 31, 2008. If interest rates had been 100 basis points higher as of December 31, 2008, the fair value of this fixed rate debt would have decreased by $88,723,000.
We do not have any exposure to foreign currency or equity price risk, and our exposure to commodity price risk is insignificant.

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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, 2008 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, 2008.
Our internal control over financial reporting as of December 31, 2008 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
Information pertaining to directors and executive officers of the Company and the Company’s Code of Conduct are 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 21, 2009.
ITEM 11. EXECUTIVE COMPENSATION
Information 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 to be held on May 21, 2009.
ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information 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 to be held on May 21, 2009.
The Company maintains the 1994 Stock Incentive Plan (the “1994 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 Company’s 1994 Plan and ESPP as of December 31, 2008:
                         
                    (c)  
                    Number of securities  
    (a)     (b)     remaining available for  
    Number of securities to be     Weighted-average     future issuance under equity  
    issued upon exercise of     exercise price of     compensation plans  
    outstanding options,     outstanding options,     (excluding securities  
Plan category   warrants and rights     warrants and rights     reflected in column (a))  
Equity compensation plans approved by security holders (1)
    2,733,553 (2)   $ 83.49 (3)     1,744,159  
Equity compensation plans not approved by security holders (4)
    —       n/a       772,275  
 
                 
Total
    2,733,553     $ 83.49 (3)     2,516,434  
 
                 
 
(1)   Consists of the 1994 Plan.
 
(2)   Includes 110,418 deferred units granted under 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 207,070 shares of restricted stock that are outstanding and that are already reflected in the Company’s outstanding shares.
 
(3)   Excludes deferred units granted under 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.

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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
Information 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 21, 2009.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information 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 21, 2009.

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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:    
 
       
Reports of Independent Registered Public Accounting Firm   F-1
 
       
Consolidated Balance Sheets as of December 31, 2008 and 2007   F-3
 
       
Consolidated Statements of Operations and Other Comprehensive Income for the years ended December 31, 2008, 2007 and 2006   F-4
 
       
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2008, 2007 and 2006   F-5
 
       
Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006   F-6
 
       
Notes to Consolidated Financial Statements   F-8
 
       
15(a)(2)
  Financial Statement Schedule    
 
       
Schedule III — Real Estate and Accumulated Depreciation   F-39
 
       
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
  —   Amended and Restated Bylaws of the Company, as adopted by the Board of Directors on February 13, 2003. (Filed herewith.)
4.1
  —   Indenture for Senior Debt Securities, dated as of January 16, 1998, between the Company and State Street Bank and Trust Company, as Trustee. (Incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-3 of the Company (File No. 333-139839), filed January 8, 2007.)
4.2
  —   First Supplemental Indenture, dated as of January 20, 1998, between the Company and State Street Bank and Trust Company as Trustee. (Incorporated by reference to Exhibit 4.2 to Registration Statement on Form S-3 of the Company (File No. 333-139839), filed January 8, 2007.)
4.3
  —   Second Supplemental Indenture, dated as of July 7, 1998, between the Company and State Street Bank and Trust Company as Trustee. (Incorporated by reference to Exhibit 4.3 to Registration Statement on Form S-3 of the Company (File No. 333-139839), filed January 8, 2007.)
4.4
  —   Amended and Restated Third Supplemental Indenture, dated as of July 10, 2000 between the Company and State Street Bank and Trust Company as Trustee. (Incorporated by reference to Exhibit 4.4 to Registration Statement on Form S-3 of the Company (File No. 333-139839), filed January 8, 2007.)
4.5
  —   Fourth Supplemental Indenture, dated as of September 18, 2006, between the Company and U.S. Bank National Association as Trustee. (Incorporated by reference to Exhibit 4.5 to Registration Statement on Form S-3 of the Company (File No. 333-139839), filed January 8, 2007.)
4.6
  —   Dividend Reinvestment and Stock Purchase Plan of the Company. (Incorporated by reference to Exhibit 8.1 to Registration Statement on Form S-3 of the Company (File No. 333-87063), filed September 14, 1999.)
4.7
  —   Amendment to the Company’s Dividend Reinvestment and Stock Purchase Plan filed on December 17, 1999. (Incorporated by reference to the Prospectus Supplement filed pursuant to Rule 424(b)(2) of the Securities Act of 1933 on December 17, 1999.)
4.8
  —   Amendment to the Company’s Dividend Reinvestment and Stock Purchase Plan filed on March 26, 2004. (Incorporated by reference to the Prospectus Supplement filed pursuant to Rule 424(b)(3) of the Securities Act of 1933 on March 26, 2004.)
10.1
  —   Amended and Restated Distribution Agreement, dated August 6, 2003, among the Company and the Agents, including Administrative Procedures, relating to the MTNs. (Filed herewith.)

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10.2
  —   Amended and Restated Limited Partnership Agreement of AvalonBay Value Added Fund, L.P., dated as of March 16, 2005. (Incorporated by reference to Exhibit 10.1 to Form 10-Q of the Company filed May 6, 2005.)
10.3
  —   Term Loan Agreement, dated May 15, 2008, among the Company, as Borrower, JPMorgan Chase Bank, N.A., as Syndication Agent, Sumitomo Mitsui Banking Corporation, Wells Fargo Bank, N.A., and Deutsche Bank Trust Company Americas, each as a Documentation Agent, the other banks signatory thereto, each as a Bank, J.P. Morgan Securities, Inc., as Sole Bookrunner and Lead Arranger, and Bank of America, N.A., as Administrative Agent. (Incorporated by reference to Exhibit 10.1 to Form 8-K of the Company filed on May 19, 2008.)
10.4+
  —   Endorsement Split Dollar Agreements and Amendments thereto with Messrs. Blair, Naughton, Fuller, Sargeant, Horey and Meyer (Incorporated by reference to Exhibit 10.2 to Form 10-Q of the Company filed May 6, 2005.)
10.5+
  —   Form of Amendment to Endorsement Split Dollar Agreement with Messrs. Blair, Naughton, Sargeant, and Horey. (Filed herewith.)
10.6+
  —   Employment Agreement, dated as of July 1, 2003, between the Company and Thomas J. Sargeant. (Incorporated by reference to Exhibit 10.1 to Amendment No. 3 to the Company’s Registration Statement on Form S-3 (File No. 333-103755), filed July 7, 2003.)
10.7+
  —   First Amendment to Employment Agreement between the Company and Thomas J. Sargeant, dated as of March 31, 2005. (Incorporated by reference to Exhibit 10.5 to Form 10-Q of the Company filed May 6, 2005.)
10.8+
  —   Form of Second Amendment to Employment Agreements between the Company and Certain Executive Officers. (Incorporated by reference to Exhibit 10.2 to form 8-K of the Company filed on May 22, 2008.)
10.9+
  —   Third Amendment to Employment Agreement between the Company and Thomas J. Sargeant, dated as of December 14, 2008. (Filed herewith.)
10.10+
  —   Employment Agreement, dated as of January 10, 2003, between the Company and Bryce Blair. (Filed herewith.)
10.11+
  —   First Amendment to Employment Agreement between the Company and Bryce Blair, dated as of March 31, 2005. (Incorporated by reference to Exhibit 10.3 to Form 10-Q of the Company filed May 6, 2005.)
10.12+
  —   Third Amendment to Employment Agreement between the Company and Bryce Blair, dated as of December 14, 2008. (Filed herewith.)
10.13+
  —   Employment Agreement, dated as of February 26, 2001, between the Company and Timothy J. Naughton. (Incorporated by reference to Exhibit 10.8 to Form 10-K of the Company filed March 1, 2007.)
10.14+
  —   First Amendment to Employment Agreement between the Company and Timothy J. Naughton, dated as of March 31, 2005. (Incorporated by reference to Exhibit 10.4 to Form 10-Q of the Company filed May 6, 2005.)
10.15+
  —   Third Amendment to Employment Agreement between the Company and Timothy J. Naughton, dated as of December 14, 2008. (Filed herewith.)

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10.16+
  —   Employment Agreement, dated as of September 10, 2001, between the Company and Leo S. Horey. (Incorporated by reference to Exhibit 10.10 to Form 10-K of the Company filed March 1, 2007.)
10.17+
  —   First Amendment to Employment Agreement between the Company and Leo S. Horey, dated as of March 31, 2005. (Incorporated by reference to Exhibit 10.6 to Form 10-Q of the Company filed May 6, 2005.)
10.18+
  —   Third Amendment to Employment Agreement between the Company and Leo S. Horey, dated as of December 14, 2008.) (Filed herewith.)
10.19+
  —   Retirement Agreement, dated as of March 24, 2000, between the Company and Gilbert M. Meyer. (Incorporated by reference to Exhibit 10.15 to Form 10-K of the Company filed March 1, 2007.)
10.20+
  —   First Amendment to Retirement Agreement between the Company and Gilbert M. Meyer, dated as of March 31, 2005. (Incorporated by reference to Exhibit 10.8 to Form 10-Q of the Company filed May 6, 2005.)
10.21+
  —   AvalonBay Communities, Inc. 1994 Stock Incentive Plan, as amended and restated in full on December 8, 2004. (Filed herewith.)
10.22+
  —   Amendment, dated February 9, 2006, to the AvalonBay Communities, Inc. 1994 Stock Incentive Plan, as amended and restated on December 8, 2004. (Incorporated by reference to Exhibit 10.32 to Form 10-K of the Company filed March 14, 2006.)
10.23+
  —   Amendment, dated December 6, 2006, to the AvalonBay Communities, Inc. 1994 Stock Incentive Plan, as amended and restated on December 8, 2004. (Incorporated by reference to Exhibit 10.22 1 to Form 10-K of the Company filed March 1, 2007.)
10.24+
  —   Amendment, dated September 20, 2007, to the AvalonBay Communities, Inc. 1994 Stock Incentive Plan, as amended and restated on December 8, 2004. (Incorporated by reference to Exhibit 10.1 to Form 10-Q of the Company filed November 9, 2007.)
10.25+
  —   1996 Non-Qualified Employee Stock Purchase Plan, dated June 26, 1997, as amended and restated. (Incorporated by reference to Exhibit 99.1 to Post-effective Amendment No. 1 to Registration Statement on Form S-8 of the Company (File No. 333-16837), filed June 26, 1997.)
10.26+
  —   1996 Non-Qualified Employee Stock Purchase Plan — Plan Information Statement dated June 26, 1997. (Incorporated by reference to Exhibit 99.2 to Registration Statement on Form S-8 of the Company (File No. 333-16837), filed November 26, 1996.)
10.27+
  —   Form of Indemnity Agreement between the Company and its Directors. (Incorporated by reference to Exhibit 10.1 to Form 10-Q of the Company filed November 9, 2005.)
10.28+
  —   The Company’s Officer Severance Plan, as amended and restated on November 18, 2008. (Filed herewith.)
10.29+
  —   Form of AvalonBay Communities, Inc. Non-Qualified Stock Option Agreement (1994 Stock Incentive Plan, as Amended and Restated). (Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on February 12, 2008.)

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10.30+
  —   Form of Addendum to AvalonBay Communities, Inc. Non-Qualified Stock Option Agreement for Certain Officers. (Filed herewith.)
10.31+
  —   Form of AvalonBay Communities, Inc. Incentive Stock Option Agreement (1994 Stock Incentive Plan, as Amended and Restated). (Incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on February 12, 2008.)
10.32+
  —   Form of Addendum to AvalonBay Communities, Inc. Incentive Stock Option Agreement for Certain Officers. (Filed herewith.)
10.33+
  —   Form of AvalonBay Communities, Inc. Employee Stock Grant and Restricted Stock Agreement. (Filed herewith.)
10.34+
  —   Form of AvalonBay Communities, Inc. Director Restricted Unit Agreement. (Incorporated by reference to Exhibit 10.4 to the Company’s Form 10-Q filed on November 9, 2007.)
10.35+
  —   Form of AvalonBay Communities, Inc. Director Restricted Stock Agreement. (Incorporated by reference to Exhibit 10.3 to the Company’s Form 10-Q filed on November 9, 2007.)
10.36.1
  —   Second Amended and Restated Revolving Loan Agreement, dated as of November 14, 2006, among the Company, as Borrower, JPMorgan Chase Bank, N.A., and Wachovia Bank, National Association, each as a Bank and Syndication Agent, Bank of America, N.A., as a Bank, Swing Lender and Issuing Bank, Morgan Stanley Bank, Wells Fargo Bank, National Association, and Deutsche Bank Trust Company Americas, each as a Bank and Documentation Agent, the other banks signatory thereto, each as a Bank, J.P. Morgan Securities, Inc., as Sole Bookrunner and Lead Arranger, and Bank of America, N.A., as Administrative Agent. (Incorporated by reference to Exhibit 10.1 to Form 8-K of the Company filed November 17, 2006.)
10.36.2
  —   First Amendment to the Second Amended and Restated Revolving Loan Agreement, dated as of November 13, 2007, among the Company, as Borrower, the banks signatory thereto, each as a Bank, and Bank of America, N.A., as Administrative Agent. (Incorporated by reference to Exhibit 10.1 to Form 8-K of the Company filed November 16, 2007.)
10.37+
  —   Rules and Procedures for Non-Employee Directors’ Deferred Compensation Program. (Incorporated by reference to Exhibit 10.33 to Form 10-K of the Company filed March 1, 2007.)
10.38+
  —   Amendment to Rules and Procedures for Non-Employee Directors’ Deferred Compensation Program adopted December 11, 2008. (Filed herewith.)
10.39+
  —   Compensation Arrangements for Directors and Named Executive Officers. (Incorporated by reference to Item 5.02 of the Company’s Current Report on Form 8-K filed February 12, 2008.)
10.40+
  —   Amendment, effective September 30, 2007, to the Company’s quarterly compensation of Non-Employee Directors. (Incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q filed on November 9, 2007.)

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10.41+
  —   Form of AvalonBay Communities, Inc. 2008 Performance Plan Deferred Stock Award Agreement. (Incorporated by reference to Exhibit 10.1 to Form 8-K of the Company filed on May 22, 2008).
10.42+
  —   Amended and Restated AvalonBay Communities, Inc. Deferred Compensation Plan. (Filed herewith.)
12.1
  —   Statements re: Computation of Ratios. (Filed herewith.)
21.1
  —   Schedule of Subsidiaries of the Company. (Filed herewith.)
23.1
  —   Consent of Ernst & Young LLP. (Filed herewith.)
31.1
  —   Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer). (Filed herewith.)
31.2
  —   Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer). (Filed herewith.)
32
  —   Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer and Chief Financial Officer). (Furnished herewith.)
 
+   Management contract or compensatory plan or arrangement required to be filed or incorporated by reference as an exhibit to this Form 10-K pursuant to Item 15(a)(3) of Form 10-K.

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SIGNATURES
     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
         
  AvalonBay Communities, Inc.
 
 
Date: February 27, 2009  By:   /s/ Bryce Blair    
    Bryce Blair, Chairman of the Board and Chief   
    Executive Officer   
 
         
     
     
     
     
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
         
     
Date: February 27, 2009  By:    /s/ Bryce Blair  
    Bryce Blair, Director, Chairman of the Board    
    and Chief Executive Officer
(Principal Executive Officer) 
 
 
     
Date: February 27, 2009  By:    /s/ Thomas J. Sargeant  
    Thomas J. Sargeant, Chief Financial Officer   
    (Principal Financial and Accounting Officer)   
 
     
Date: February 27, 2009  By:    /s/ Bruce A. Choate  
    Bruce A. Choate, Director   
       
 
     
Date: February 27, 2009  By:    /s/ John J. Healy, Jr.  
    John J. Healy, Jr., Director   
       
 
     
Date: February 27, 2009  By:    /s/ Gilbert M. Meyer  
    Gilbert M. Meyer, Director   
       
 
     
Date: February 27, 2009  By:    /s/ Timothy J. Naughton  
    Timothy J. Naughton, Director   
       
 
     
Date: February 27, 2009  By:    /s/ Lance R. Primis  
    Lance R. Primis, Director   
       
 
     
Date: February 27, 2009  By:    /s/ Peter S. Rummell  
    Peter S. Rummell, Director   
       
 
     
Date: February 27, 2009  By:    /s/ H. Jay Sarles  
    H. Jay Sarles, Director   
       
 
     
Date: February 27, 2009  By:    /s/ W. Edward Walter  
    W. Edward Walter, Director   
       
 

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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
AvalonBay Communities, Inc.:
We have audited the accompanying consolidated balance sheets of AvalonBay Communities, Inc. as of December 31, 2008 and 2007, and the related consolidated statements of operations and other comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2008. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of AvalonBay Communities, Inc. at December 31, 2008 and 2007, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2008 in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), AvalonBay Communities, Inc.’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2009 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
McLean, Virginia
February 25, 2009

F-1


 

Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
The Board of Directors and Stockholders of
AvalonBay Communities, Inc.:
We have audited AvalonBay Communities, Inc.’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). AvalonBay Communities, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting in Item 9a. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, AvalonBay Communities, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of AvalonBay Communities, Inc. as of December 31, 2008 and 2007, and the related consolidated statements of operations and other comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2008 of AvalonBay Communities, Inc. and our report dated February 25, 2009 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
McLean, Virginia
February 25, 2009

F-2


 

AVALONBAY COMMUNITIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
                 
    12-31-08     12-31-07  
ASSETS
               
Real estate:
               
Land
  $ 1,151,456     $ 966,021  
Buildings and improvements
    5,569,034       4,833,328  
Furniture, fixtures and equipment
    175,480       151,976  
 
           
 
    6,895,970       5,951,325  
Less accumulated depreciation
    (1,352,744 )     (1,158,899 )
 
           
Net operating real estate
    5,543,226       4,792,426  
Construction in progress, including land
    867,061       946,814  
Land held for development
    239,456       288,423  
Operating real estate assets held for sale, net
    —       269,519  
 
           
Total real estate, net
    6,649,743       6,297,182  
 
               
Cash and cash equivalents
    65,706       20,271  
Cash in escrow
    193,599       188,264  
Resident security deposits
    29,935       29,240  
Investments in unconsolidated real estate entities
    55,025       57,990  
Deferred financing costs, net
    31,374       27,421  
Deferred development costs
    57,365       60,996  
Prepaid expenses and other assets
    90,627       55,120  
 
           
Total assets
  $ 7,173,374     $ 6,736,484  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Unsecured notes, net
  $ 2,002,965     $ 1,893,499  
Variable rate unsecured credit facility
    124,000       514,500  
Mortgage notes payable
    1,547,492       750,062  
Dividends payable
    208,209       67,909  
Payables for construction
    64,257       91,275  
Accrued expenses and other liabilities
    227,827       233,326  
Accrued interest payable
    32,651       38,503  
Resident security deposits
    40,603       39,938  
Liabilities related to real estate assets held for sale
    —       57,666  
 
           
Total liabilities
    4,248,004       3,686,678  
 
           
 
               
Minority interest in consolidated ventures
    8,974       23,152  
 
               
Commitments and contingencies
    —       —  
 
               
Stockholders’ equity:
               
Preferred stock, $0.01 par value; $25 liquidation preference; 50,000,000 shares authorized at both December 31, 2008 and December 31, 2007; zero shares issued and outstanding at December 31, 2008 and 4,000,000 shares issued and outstanding at December 31, 2007
    —       40  
Common stock, $0.01 par value; 140,000,000 shares authorized at both December 31, 2008 and December 31, 2007; 77,119,963 and 77,318,611 shares issued and outstanding at December 31, 2008 and December 31, 2007, respectively
    771       773  
Additional paid-in capital
    2,940,499       3,026,708  
Accumulated earnings less dividends
    (21,942 )     2,499  
Accumulated other comprehensive loss
    (2,932 )     (3,366 )
 
           
Total stockholders’ equity
    2,916,396       3,026,654  
 
           
 
               
 
           
Total liabilities and stockholders’ equity
  $ 7,173,374     $ 6,736,484  
 
           
See accompanying notes to Consolidated Financial Statements.

F-3


 

AVALONBAY COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME
(Dollars in thousands, except per share data)
                         
    For the year ended  
    12-31-08     12-31-07     12-31-06  
Revenue:
                       
Rental and other income
  $ 847,640     $ 760,521     $ 671,382  
Management, development and other fees
    6,568       6,142       6,259  
 
                 
Total revenue
    854,208       766,663       677,641  
 
                 
 
                       
Expenses:
                       
Operating expenses, excluding property taxes
    258,162       231,688       206,059  
Property taxes
    77,267       70,562       62,651  
Interest expense, net
    114,878       94,540       106,271  
Depreciation expense
    194,150       168,324       149,352  
General and administrative expense
    42,781       28,494       24,767  
Impairment loss — land holdings
    57,899       —       —  
 
                 
Total expenses
    745,137       593,608       549,100  
 
                 
 
                       
Equity in income of unconsolidated entities
    4,566       59,169       7,455  
Minority interest income (expense) in consolidated partnerships
    741       (1,585 )     (573 )
Gain on sale of land
    —       545       13,519  
 
                 
Income from continuing operations
    114,378       231,184       148,942  
 
                 
Discontinued operations:
                       
Income from discontinued operations
    12,208       20,489       20,193  
Gain on sale of communities
    284,901       106,487       97,411  
 
                 
Total discontinued operations
    297,109       126,976       117,604  
 
                 
 
                       
Net income
    411,487       358,160       266,546  
Dividends attributable to preferred stock
    (10,454 )     (8,700 )     (8,700 )
 
                 
 
                       
Net income available to common stockholders
  $ 401,033     $ 349,460     $ 257,846  
 
                 
   
Other comprehensive income:
                       
Unrealized gain on cash flow hedges
    434       213       891  
 
                 
Comprehensive income
  $ 401,467     $ 349,673     $ 258,737  
 
                 
 
                       
Earnings per common share — basic:
                       
Income from continuing operations (net of dividends attributable to preferred stock)
  $ 1.35     $ 2.83     $ 1.89  
Discontinued operations
    3.87       1.61       1.59  
 
                 
Net income available to common stockholders
  $ 5.22     $ 4.44     $ 3.48  
 
                 
 
                       
Earnings per common share — diluted:
                       
Income from continuing operations (net of dividends attributable to preferred stock)
  $ 1.34     $ 2.79     $ 1.86  
Discontinued operations
    3.83       1.59       1.56  
 
                 
Net income available to common stockholders
  $ 5.17     $ 4.38     $ 3.42  
 
                 
See accompanying notes to Consolidated Financial Statements.

F-4


 

AVALONBAY COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Dollars in thousands)
 
                                                               
                                            Accumulated     Accumulated        
    Shares issued                     Additional     earnings     other     Total  
    Preferred     Common     Preferred     Common     paid-in     less     comprehensive     stockholders’  
    stock     stock     stock     stock     capital     dividends     loss     equity  
Balance at December 31, 2005
    4,000,000       73,663,048     $ 40     $ 737     $ 2,429,568     $ 71,950     $ (4,470 )   $ 2,497,825  
 
                                                               
Net income
    —       —       —       —       —       266,546       —       266,546  
Unrealized gain on cash flow hedges
    —       —       —       —       —       —       891       891  
Change in redemption value of minority interest
    —       —       —       —       —       (2,593 )     —       (2,593 )
Dividends declared to common and preferred stockholders
    —       —       —       —       —       (241,155 )     —       (241,155 )
Issuance of common stock
    —       1,005,324       —       10       38,839       (1,318 )     —       37,531  
Amortization of deferred compensation
    —       —       —       —       14,109       —