EMPLOYMENT AGREEMENT RE: THOMAS J. SARGEANT

EXHIBIT 10.4



EMPLOYMENT AGREEMENT

EMPLOYMENT AGREEMENT (this "Agreement") made as of the 9th day of
March, 1998 by and between Thomas J. Sargeant ("Executive") and Bay Apartment
Communities, Inc., a Maryland corporation (the "Company").

WHEREAS, Executive and Avalon Properties, Inc. ("Avalon") have
previously entered into an Employment Agreement, dated as of April 4, 1997 (the
"Prior Agreement"); and

WHEREAS, pursuant to the Agreement and Plan of Merger, by and between
the Company and Avalon, dated as of March_9, 1998 (the "Merger Agreement"),
Avalon will merge into the Company (the "Merger"); and

WHEREAS, Executive and the Company desire to enter into a new
employment agreement, effective as of the consummation of the merger
contemplated by the Merger Agreement (the "Effective Date"), to replace the
Prior Agreement.

NOW, THEREFORE, the parties hereto do hereby agree as follows.

1. Term. Subject to the consummation of the merger contemplated by the
Merger Agreement, the Company hereby agrees to employ Executive, and
Executive hereby agrees to remain in the employ of the Company subject
to the terms and conditions of this Agreement for the period
commencing on the Effective Date and terminating on the third
anniversary of the Effective Date (the "Original Term"), unless
earlier terminated as provided in Section 7. The Original Term shall
be extended automatically for additional 1 year periods (each a
"Renewal Term"), unless notice that this Agreement will not be
extended is given by either party to the other 6 months prior to the
expiration of the Original Term or any Renewal Term. Notwithstanding
the foregoing, upon a Change in Control, the Employment Period shall
be extended automatically to 3 years from the date of such Change in
Control. (The period of Executive's employment hereunder within the
Original Term and any Renewal Terms is herein referred to as the
"Employment Period.")

2. Employment Duties.

a. During the Employment Period, Executive shall be employed in
the business of the Company and its affiliates. Executive
shall serve as a corporate officer of the Company with the
title of Senior Vice President-Chief Financial Officer.
Executive's duties and authority shall be commensurate with
his title and position with the Company, and shall not be
materially diminished from, or materially inconsistent with,
his primary duties and authority with Avalon immediately
prior to the date of this Agreement.

b. Executive agrees to his employment as described in this
Section 2 and agrees to devote substantially all of his
working time and efforts to the performance of his duties
under this Agreement; provided that nothing herein shall be
interpreted to preclude Executive from (i) participating with
the prior written consent of the Board of Directors as an
officer or director of, or advisor to, any other entity or
organization that is not a customer or material service
provider to the Company or a Competing Enterprise, as defined
in Section 8, so long as such participation does not
interfere with the performance of Executive's duties
hereunder, whether or not such entity or organization is
engaged in religious, charitable or other community or
non-profit activities, (ii) investing in any entity or
organization which is not a customer or material service
provider to the Company or a Competing Enterprise, so long as
such investment does not interfere with the performance of
Executive's duties hereunder, or (iii) delivering lectures or
fulfilling speaking engagements so long as such lectures or
engagements do not interfere with the performance of
Executive's duties hereunder. The Company consents to
Executive's status as a "former partner" with a current
financial interest in certain Midwest projects of Trammell
Crow Residential ("TCR"), and such activity shall not be
treated as a Competing Enterprise.

c. In performing his duties hereunder, Executive shall be
available for reasonable travel as the needs of the business
require. Executive shall be based in Alexandria, VA or
otherwise in the greater Washington, D.C. metropolitan area.

d. Breach by either party of any of its respective obligations
under this Section 2 shall be deemed a material breach of
that party's obligations hereunder.

3. Compensation/Benefits. In consideration of Executive's services
hereunder, the Company shall provide Executive the following:

a. Base Salary. During the Employment Period, the Executive
shall receive an annual rate of base salary ("Base Salary")
in an amount not less than $270,000. Executive's Base Salary
will be reviewed by the Company as of the first anniversary
of the Effective Date, and may be adjusted upward (but not
downward) at such time to reflect any inequities in
compensation. Commencing as of January 1, 2000, Executive's
Base Salary shall be reviewed no less frequently than
annually by the Company and may be adjusted upward (but not
downward) by the Company. Upon such annual review during the
Renewal Term, if any, Executive's Base Salary shall be
increased to the greatest of (i) an amount equal to Base
Salary for the prior year plus 5%, (ii) a factor measured by
the increase, if any, in the Consumer Price Index for Wage
Earners and Clerical Workers (CPI-W) (City Average for
Washington, D.C.-MD-VA 1982-84=100), as published by the
Bureau of Labor Statistics, for the prior calendar year (the
"CPI
Adjustment") or (iii) such greater amount as may be agreed by
Executive and the Company. Base Salary shall be payable in
accordance with the Company's normal business practices, but
in no event less frequently than monthly.

b. Bonuses. Commencing at the close of each fiscal year during
the Employment Period, the Company shall review the
performance of the Company and of Executive during the prior
fiscal year, and the Company may provide Executive with
additional compensation as a bonus if the Board, or any
compensation committee hereof, in its discretion, determines
that Executive's contribution to the Company warrants such
additional payment and the Company's anticipated financial
performance of the present period permits such payment. The
bonuses hereunder shall be paid as a lump sum not later than
60 days after the end of the Company's preceding fiscal year.

c. Medical Insurance/Physical. During the Employment Period, the
Company shall provide to Executive and Executive's immediate
family a comprehensive policy of health insurance. During the
Employment Period, Executive shall be entitled to a
comprehensive annual physical performed, at the expense of
the Company by the physician or medical group of Executive's
choosing.

d. Life Insurance/Disability Insurance. During the Employment
Period, the Company shall keep in force and pay the premiums
on the split-dollar life insurance policy referenced in the
Split Dollar Insurance Agreement between Avalon and
Executive, subject to reimbursement by Executive as provided
in such Split Dollar Insurance Agreement. The Company shall
reimburse Executive for the cost of the comprehensive
disability insurance policy, which is in effect on January 1,
1997, and shall also be responsible for any increases in
premiums which become effective during the Employment Period
as may be necessary to maintain the same level of insurance
as in effect on January 1, 1997. Executive agrees to submit
to such medical examinations as may be required in order to
maintain such policies of insurance.

e. Vacations. Executive shall be entitled to reasonable paid
vacations during the Employment Period in accordance with the
then regular procedures of the Company governing executives,
not to exceed 6 weeks per annum, in the aggregate.

f. Office/Secretary, etc. During the Employment Period,
Executive shall be entitled to secretarial services and a
private office commensurate with his title and duties.

g. Avalon Stock Option. The Company acknowledges that,
notwithstanding the consummation of the Merger, Avalon
granted to Executive on March 8, 1998, a




non-qualified employee stock option to purchase 91,110 shares
of common stock of Avalon, par value $.01 per share (the
"Avalon Stock Option"). The Avalon Stock Option was granted
at an exercise price equal to $28.8125. Upon termination of
Executive's employment, vesting and exercisability of the
Avalon Stock Option shall be governed by the terms of the
stock option agreement and this Agreement, as applicable.
During the Employment Period, Executive shall be eligible for
future employee stock option grants on the same basis as
other senior management of the Company.

h. Automobile. The Company shall provide Executive with a
monthly car allowance during the Employment Period of not
less than $750 per month (adjusted annually for inflation by
the CPI Adjustment); provided that, at Executive's election,
the Company may instead purchase or lease, and maintain
insurance for, an automobile of comparable value for use by
Executive, who shall be responsible for maintaining such
automobile, at his own expense, with the same standard of
care Executive applies to his own property and as may be
required under any applicable lease agreement.

i. Other Benefits. During the Employment Period, the Company
shall provide to Executive such other benefits, excluding
severance benefits, but including the right to participate in
such retirement or pension plans, as are made generally
available to executives of the Company from time to time, and
shall be given credit for purposes of eligibility and vesting
of employee benefits and benefit accrual for service with
Avalon, its affiliates and TCR prior to the Effective Date
under each benefit plan of the Company and its subsidiaries
to the extent such service had been credited under employee
benefit plans of Avalon and its subsidiaries, provided that
no such crediting of service results in duplication of
benefits.

4. Expenses/Indemnification.

a. During the Employment Period, the Company shall reimburse
Executive for the reasonable business expenses incurred by
Executive in the course of performing his duties for the
Company hereunder, upon submission of invoices, vouchers or
other appropriate documentation, as may be required in
accordance with the policies in effect from time to time for
executive employees of the Company.

b. To the fullest extent permitted by law, the Company shall
indemnify Executive with respect to any actions commenced
against Executive in his capacity as an officer or director
or former officer or director of the Company, or any
affiliate thereof for which he may render service in such
capacity, whether by or on behalf of the Company, its
shareholders or third parties, and the Company shall advance




to Executive on a timely basis an amount equal to the
reasonable fees and expenses incurred in defending such
actions, after receipt of an itemized request for such
advance, and an undertaking from Executive to repay the
amount of such advance, with interest at a reasonable rate
from the date of the request, as determined by the Company,
if it shall ultimately be determined that he is not entitled
to be indemnified against such expenses. The Company agrees
to use its best efforts to secure and maintain officers and
directors' liability insurance with respect to Executive.

5. Employer's Authority/Policies.

a. General. Executive agrees to observe and comply with the
rules and regulations of the Company as adopted by its Board
respecting the performance of his duties and to carry out and
perform orders, directions and policies communicated to him
from time to time by the Board.

b. Ethics Policies. Executive agrees to comply with and be bound
by the Ethics Policies of the Company, as reflected in the
attachment at Annex A hereto and made a part hereof.

6. Records/Nondisclosure/Company Policies.

a. General. All records, financial statements and similar
documents obtained, reviewed or compiled by Executive in the
course of the performance by him of services for the Company,
whether or not confidential information or trade secrets,
shall be the exclusive property of the Company. Executive
shall have no rights in such documents upon any termination
of this Agreement.

b. Nondisclosure Agreement. Without limitation of the Company's
rights under Section 6(a), Executive agrees to abide by and
be bound by the Nondisclosure Agreement of the Company
executed by Executive and the Company as reflected in the
attachment at Annex B and made a part hereof.

7. Termination; Severance and Related Matters.

a. At-Will Employment. Executive's employment hereunder is "at
will" and, therefore, may be terminated at any time, with or
without Cause, at the option of the Company, subject only to
the severance obligations under this Section 7. Upon any
termination hereunder, the Employment Period shall expire.

b. Definitions. For purposes of this Section 7, the following
terms shall have the indicated definitions:





i. Cause. "Cause" shall mean:

(1) Executive is convicted of or enters a plea
of nolo contendere to an act which is
defined as a felony under any federal,
state or local law, not based upon a
traffic violation, which conviction or plea
has or can be expected to have, in the good
faith opinion of the Board of Directors, a
material adverse impact on the business or
reputation of the Company;

(2) any one or more acts of theft, larceny,
embezzlement, fraud or material intentional
misappropriation from or with respect to
the Company;

(3) a breach by Executive of his fiduciary
duties under Maryland law as an officer;

(4) Executive's commission of any one or more
acts of gross negligence or willful
misconduct which in the good faith opinion
of the Board of Directors has resulted in
material harm to the business or reputation
of the Company; or

(5) default by Executive in the performance of
his material duties under this Agreement,
without correction of such action within 15
days of written notice thereof.

Notwithstanding the foregoing, no termination of Executive's
employment by the Company shall be treated as for Cause or be effective until
and unless all of the steps described in subparagraphs (i) through (iii) below
have been complied with:

i.Notice of intention to terminate for Cause has been given by the Company
within 120 days after the Board of Directors learns of the act, failure or
event (or latest in a series of acts, failures or events) constituting "Cause";

ii.The Board of Directors has voted (at a meeting of the Board of Directors
duly called and held as to which termination of Executive is an agenda item) to
terminate Executive for Cause after Executive has been given notice of the
particular acts or circumstances which are the basis for the termination for
Cause and has been afforded at least 20 days notice after the meeting and an
opportunity to present his position in writing; and

iii.The Board of Directors has given a Notice of Termination to Executive
within 20 days of such Board meeting.



The Company may suspend Executive with pay at any time during the
period commencing with the giving of notice to Executive under clause (i) above
until final Notice of Termination is given under clause (iii) above. Upon the
giving of notice as provided in clause (iii) above, no further payments shall
be due Executive.

ii. Change in Control. A "Change in Control" shall mean
the occurrence of any one or more of the following
events following the Effective Date:

(1) Any individual, entity or group (a
"Person") within the meaning of Sections
13(d) and 14(d) of the Securities Exchange
Act of 1934 (the "Act") (other than the
Company, any corporation, partnership,
trust or other entity controlled by the
Company (a "Subsidiary"), or any trustee,
fiduciary or other person or entity holding
securities under any employee benefit plan
or trust of the Company or any of its
Subsidiaries), together with all
"affiliates" and "associates" (as such
terms are defined in Rule 12b-2 under the
Act) of such Person, shall become the
"beneficial owner" (as such term is defined
in Rule 13d-3 under the Act) of securities
of the Company representing 30% or more of
the combined voting power of the Company's
then outstanding securities having the
right to vote generally in an election of
the Company's Board of Directors ("Voting
Securities"), other than as a result of (A)
an acquisition of securities directly from
the Company or any Subsidiary or (B) an
acquisition by any corporation pursuant to
a reorganization, consolidation or merger
if, following such reorganization,
consolidation or merger the conditions
described in clauses (A), (B) and (C) of
subparagraph (iii) of this Section 7(b)(2)
are satisfied; or

(2) Individuals who, as of the Effective Date,
constitute the Company's Board of Directors
(the "Incumbent Directors") cease for any
reason to constitute at least a majority of
the Board, provided, however, that any
individual becoming a director of the
Company subsequent to the date hereof
(excluding, for this purpose, (A) any such
individual whose initial assumption of
office is in connection with an actual or
threatened election contest relating to the
election of members of the Board of
Directors or other actual or threatened
solicitation of proxies or consents by or
on behalf of a Person other than the Board
of Directors, including by reason of
agreement intended to avoid or settle any
such actual or threatened contest or
solicitation, and (B) any individual whose
initial assumption of office is in
connection with a reorganization,





merger or consolidation, involving an
unrelated entity and occurring during the
Employment Period), whose election or
nomination for election by the Company's
shareholders was approved by a vote of at
least a majority of the persons then
comprising Incumbent Directors shall for
purposes of this Agreement be considered an
Incumbent Director; or

(3) Consummation of a reorganization, merger or
consolidation of the Company, unless,
following such reorganization, merger or
consolidation, (A) more than 50% of,
respectively, the then outstanding shares
of common stock of the corporation
resulting from such reorganization, merger
or consolidation and the combined voting
power of the then outstanding voting
securities of such corporation entitled to
vote generally in the election of directors
is then beneficially owned, directly or
indirectly, by all or substantially all of
the individuals and entities who were the
beneficial owners, respectively, of the
outstanding Voting Securities immediately
prior to such reorganization, merger or
consolidation, (B) no Person (excluding the
Company, any employee benefit plan (or
related trust) of the Company, a Subsidiary
or the corporation resulting from such
reorganization, merger or consolidation or
any subsidiary thereof, and any Person
beneficially owning, immediately prior to
such reorganization, merger or
consolidation, directly or indirectly, 30%
or more of the outstanding Voting
Securities), beneficially owns, directly or
indirectly, 30% or more of, respectively,
the then outstanding shares of common stock
of the corporation resulting from such
reorganization, merger or consolidation or
the combined voting power of the then
outstanding voting securities of such
corporation entitled to vote generally in
the election of directors, and (C) at least
a majority of the members of the board of
directors of the corporation resulting from
such reorganization, merger or
consolidation were members of the Incumbent
Board at the time of the execution of the
initial agreement providing for such
reorganization, merger or consolidation;

(4) Approval by the shareholders of the Company
of a complete liquidation or dissolution of
the Company; or

(5) The sale, lease, exchange or other
disposition of all or substantially all of
the assets of the Company, other than to a
corporation, with respect to which
following such sale, lease, exchange or
other




disposition (A) more than 50% of,
respectively, the then outstanding shares
of common stock of such corporation and the
combined voting power of the then
outstanding voting securities of such
corporation entitled to vote generally in
the election of directors is then
beneficially owned, directly or indirectly,
by all or substantially all of the
individuals and entities who were the
beneficial owners of the outstanding Voting
Securities immediately prior to such sale,
lease, exchange or other disposition, (B)
no Person (excluding the Company and any
employee benefit plan (or related trust) of
the Company or a Subsidiary or such
corporation or a subsidiary thereof and any
Person beneficially owning, immediately
prior to such sale, lease, exchange or
other disposition, directly or indirectly,
30% or more of the outstanding Voting
Securities), beneficially owns, directly or
indirectly, 30% or more of, respectively,
the then outstanding shares of common stock
of such corporation and the combined voting
power of the then outstanding voting
securities of such corporation entitled to
vote generally in the election of directors
and (C) at least a majority of the members
of the board of directors of such
corporation were members of the Incumbent
Board at the time of the execution of the
initial agreement or action of the Board of
Directors providing for such sale, lease,
exchange or other disposition of assets of
the Company.

Notwithstanding the foregoing, a "Change in Control" shall not be
deemed to have occurred for purposes of this Agreement solely as the result of
an acquisition of securities by the Company which, by reducing the number of
shares of Voting Securities outstanding, increases the proportionate voting
power represented by the Voting Securities beneficially owned by any Person to
30% or more of the combined voting power of all then outstanding Voting
Securities; provided, however, that if any Person referred to in this sentence
shall thereafter become the beneficial owner of any additional shares of Stock
or other Voting Securities (other than pursuant to a stock split, stock
dividend, or similar transaction), then a "Change in Control" shall be deemed
to have occurred for purposes of this Agreement.

iii. Complete Change in Control. A "Complete Change in
Control" shall mean that a Change in Control has
occurred, after modifying the definition of "Change
in Control" by deleting clause (i) from Section
7(b)(2) of this Agreement.

iv. Constructive Termination Without Cause.
"Constructive Termination Without Cause" shall mean
a termination of Executive's employment initiated by
Executive not later than 12 months following the
occurrence






(not including any time during which an arbitration
proceeding referenced below is pending), without
Executive's prior written consent, of one or more of
the following events (or the latest to occur in a
series of events), and effected after giving the
Company not less than 10 working days' written
notice of the specific act or acts relied upon and
right to cure:

(1) a material adverse change in the functions,
duties or responsibilities of Executive's
position which would reduce the level,
importance or scope of such position; or
any removal of Executive from or failure to
reappoint or reelect Executive to any
position set forth in this Agreement,
except in connection with the termination
of Executive's employment for Disability,
Cause, as a result of Executive's death or
by Executive other than for a Constructive
Termination Without Cause;

(2) any material breach by the Company of this
Agreement;

(3) any purported termination of Executive's
employment for Cause by the Company which
does not comply with the terms of Section
7(b)(1) of this Agreement;

(4) the failure of the Company to obtain an
agreement, satisfactory to the Executive,
from any successor or assign of the
Company, to assume and agree to perform
this Agreement, as contemplated in Section
10 of this Agreement;

(5) the failure by the Company to continue in
effect any compensation plan in which
Executive participates immediately prior to
a Change in Control which is material to
Executive's total compensation, unless
comparable alternative arrangements
(embodied in ongoing substitute or
alternative plans) have been implemented
with respect to such plans, or the failure
by the Company to continue Executive's
participation therein (or in such
substitute or alternative plans) on a basis
not materially less favorable, in terms of
the amount of benefits provided and the
level of Executive's participation relative
to other participants, as existed during
the last completed fiscal year of the
Company prior to the Change in Control;

(6) the relocation of the Company's Alexandria
offices to a new location more than fifty
(50) miles from Alexandria or the failure
to locate Executive's own office at the
Alexandria office (or at the






office to which such office is relocated
which is within 50 miles of Alexandria) or,
following a Change in Control, the failure
to locate Executive's office at the
Company's principal executive office or the
relocation of the Company's principal
executive office to a location more than 50
miles from Alexandria; or

(7) any termination of employment by the
Executive for any reason during the
12-month period immediately following a
Complete Change in Control of the Company.

Notwithstanding the foregoing, a Constructive Termination Without Cause shall
not be treated as having occurred unless Executive has given a final Notice of
Termination delivered after expiration of the Company's cure period. Executive
or the Company may, at any time after the expiration of the Company's cure
period and either prior to or up until three months after giving a final Notice
of Termination, commence an arbitration proceeding to determine the question of
whether, taking into account the actions complained of and any efforts made by
the Company to cure such actions, a termination by Executive of his employment
should be treated as a Constructive Termination Without Cause for purposes of
this Agreement. If the Executive or the Company commences such a proceeding
prior to delivery by Executive of a final Notice of Termination, the
commencement of such a proceeding shall be without prejudice to either party
and Executive's and the Company's rights and obligations under this Agreement
shall continue unaffected unless and until the arbitrator has determined such
question in the affirmative, or, if earlier, the date on which Executive or the
Company has delivered a Notice of Termination in accordance with the provisions
of this Agreement.

v. Covered Average Compensation. "Covered Average
Compensation" shall mean the sum of Executive's
Covered Compensation as calculated for the calendar
year in which the Date of Termination occurs and for
each of the two preceding calendar years, divided by
three.

vi. Covered Compensation. "Covered Compensation," for
any calendar year, shall mean an amount equal to the
sum of (i) Executive's Base Salary for the calendar
year (disregarding any decreases made effective
during the Employment Period), (ii) the cash bonus
actually earned by Executive with respect to such
calendar year, and (iii) the value of all stock and
other equity-based compensation awards made to
Executive during such calendar year.

Covered Compensation shall be calculated according to the
following rules:

(a) In valuing awards for purposes of
clause (iii) above, all such
awards shall be treated as if
fully vested when granted,




stock grants shall be valued by
reference to the fair market value
on the date of grant of the
Company's common stock, par value
$.01 per share (or of the common
stock of Avalon, as the case may
be) and other equity-based
compensation awards shall be
valued at the value established by
the Compensation Committee of the
Board of Directors on the date of
grant.

(b) In determining the cash bonus
actually paid with respect to a
calendar year, if no cash bonus
has been paid with respect to the
calendar year in which the Date of
Termination occurs, the cash bonus
paid with respect to the
immediately preceding calendar
year shall be assumed to have been
paid in each of the current and
immediately preceding calendar
years, and if no cash bonus has
been paid by the Date of
Termination with respect to the
immediately preceding calendar
year, the cash bonus paid with
respect to the second preceding
calendar year shall be assumed to
have been paid in all three of the
calendar years taken into account
in determining Covered Average
Compensation.

(c) If any cash bonus paid with
respect to the current or
immediately preceding calendar
year was paid within three months
of Executive's Date of
Termination, and is lower than the
last cash bonus paid more than
three months from the Date of
Termination, any such cash bonus
paid within three months of the
Date of Termination shall be
disregarded and the last cash
bonus paid more than three months
from the Date of Termination shall
be substituted for each cash bonus
so disregarded.

(d) In determining the amount of stock
and other equity-based
compensation awards made during a
calendar year during the averaging
period, rules similar to those set
forth in subparagraphs (B) and (C)
of this Section 7(b)(6) shall be
followed, except that all awards
made in connection with the
Company's initial public offering
shall be disregarded.

vii. Disability. "Disability" shall mean Executive has
been determined to be disabled and to qualify for
long-term disability benefits under the long-term
disability insurance policy obtained pursuant to
Section 3(d) of this Agreement.





c. Rights Upon Termination.

(1) Payment of Benefits Earned Through Date of
Termination. Upon any termination of
Executive's employment during the
Employment Period, Executive, or his
estate, shall in all events be paid all
accrued but unpaid Base Salary and all
earned but unpaid cash incentive
compensation earned through his Date of
Termination. Executive shall also retain
all such rights with respect to vested
equity-based awards as are provided under
the circumstances under the applicable
grant or award agreement, and shall be
entitled to all other benefits which are
provided under the circumstances in
accordance with the provisions of the
Company's generally applicable employee
benefit plans, practices and policies,
other than severance plans.

(2) Death. In the event of Executive's death
during the Employment Period, the Company
shall, in addition to paying the amounts
set forth in Section 7(c)(i), take whatever
action is necessary to cause all of
Executive's unvested equity-based awards to
become fully vested as of the date of death
and, in the case of equity-based awards
which have an exercise schedule, to become
fully exercisable and continue to be
exercisable for such period as is provided
in the case of vested and exercisable
awards in the event of death under the
terms of the applicable award agreements.

(3) Disability. In the event the Company elects
to terminate Executive's employment during
the Employment Period on account of
Disability, the Company shall, in addition
to paying the amounts set forth in Section
7(c)(i), pay to Executive, in one lump sum,
no later than 31 days following the Date of
Termination, an amount equal to two times
Covered Average Compensation. The Company
shall also, commencing upon the Date of
Termination:

(a) Continue, without cost to
Executive, benefits comparable to
the medical and disability
benefits provided to Executive
immediately prior to the Date of
Termination under Section 3(c) and
Section 3(d) for a period of 24
months following the Date of
Termination or until such earlier
date as Executive obtains
comparable benefits through other
employment;

(b) Continue to pay, or reimburse
Executive, for all premiums




then due or thereafter payable on
the whole-life portion of the
split-dollar insurance policy
referenced under Section 3(d) for
so long as such payments are due;
and

(c) Take whatever action is necessary
to cause Executive to become
vested as of the Date of
Termination in all stock options,
restricted stock grants, and all
other equity-based awards and be
entitled to exercise and continue
to exercise all stock options and
all other equity-based awards
having an exercise schedule and to
retain such grants and awards to
the same extent as if they were
vested upon termination of
employment in accordance with
their terms.

(4) Non-Renewal. In the event the Company gives
Executive a notice of non-renewal pursuant
to Section 1 above, the Company shall, in
addition to paying the amounts set forth in
Section 7(c)(i), commencing upon the Date
of Termination:

(a) Pay to Executive, for 12
consecutive months, commencing
with the first day of the month
immediately following the Date of
Termination, a monthly amount
equal to the result obtained by
dividing Covered Average
Compensation by twelve;

(b) Continue, without cost to
Executive, benefits comparable to
the medical and disability
benefits provided to Executive
immediately prior to the Date of
Termination under Section 3(c) and
Section 3(d) for a period of 24
months following the Date of
Termination or until such earlier
date as Executive obtains
comparable benefits through other
employment; and

(c) Take whatever action is necessary
to cause Executive to become
vested as of the Date of
Termination in all stock options,
restricted stock grants, and all
other equity-based awards and be
entitled to exercise and continue
to exercise all stock options and
all other equity-based awards
having an exercise schedule and to
retain such grants and awards to
the same extent as if they were
vested upon termination of
employment in accordance with
their terms; and

(d) Continue to pay, or reimburse
Executive for, all premiums



then due or thereafter payable on
the whole-life portion of the
split-dollar insurance policy
referenced under Section 3(d) for
so long as such payments are due.

(5) Termination Without Cause; Constructive
Termination Without Cause. In the event the
Company or any successor to the Company
terminates Executive's employment without
Cause, or if Executive terminates his
employment in a Constructive Termination
without Cause, the Company shall, in
addition to paying the amounts provided
under Section 7(c)(i), pay to Executive, in
one lump sum no later than 31 days
following the Date of Termination, an
amount equal to three times Covered Average
Compensation. The Company shall also,
commencing upon the Date of Termination:

(a) Continue, without cost to
Executive, benefits comparable to
the medical and disability
benefits provided to Executive
immediately prior to the Date of
Termination under Section 3(c) and
Section 3(d) for a period of 36
months following the Date of
Termination or until such earlier
date as Executive obtains
comparable benefits through other
employment;

(b) Continue to pay, or reimburse
Executive, for so long as such
payments are due, all premiums
then due or payable on the
whole-life portion of the
split-dollar insurance policy
referenced under Section 3(d); and

(c) Take whatever action is necessary
to cause Executive to become
vested as of the Date of
Termination in all stock options,
restricted stock grants, and all
other equity-based awards and be
entitled to exercise and continue
to exercise all stock options and
all other equity-based awards
having an exercise schedule and to
retain such grants and awards to
the same extent as if they were
vested upon termination of
employment in accordance with
their terms.

(6) Termination for Cause; Voluntary
Resignation. In the event Executive's
employment terminates during the Employment
Period other than in connection with a
termination meeting the conditions of
subparagraphs (ii), (iii), (iv), or (v) of
this Section 7(c), Executive shall receive
the amounts set forth in Section 7(c)(i) in
full satisfaction of all of his
entitlements from the Company. All





equity-based awards not vested as of the
Date of Termination shall terminate (unless
otherwise provided in the applicable award
agreement) and Executive shall have no
further entitlements with respect thereto.

d. Additional Benefits.

(1) Anything in this Agreement to the contrary
notwithstanding, in the event it shall be
determined that any payment or distribution
by the Company to or for the benefit of
Executive, whether paid or payable or
distributed or distributable (1) pursuant
to the terms of Section 7 of this
Agreement, (2) pursuant to or in connection
with any compensatory or employee benefit
plan, agreement or arrangement, including
but not limited to any stock options,
restricted or unrestricted stock grants
issued to or for the benefit of Executive
and forgiveness of any loans by the Company
to Executive or (3) otherwise
(collectively, "Severance Payments"), would
be subject to the excise tax imposed by
Section 4999 of the Internal Revenue Code
of 1986, as amended (the "Code"), and any
interest or penalties are incurred by
Executive with respect to such excise tax
(such excise tax, together with any such
interest and penalties, are hereinafter
collectively referred to as the "Excise
Tax"), then Executive shall be entitled to
receive an additional payment (a "Partial
Gross-Up Payment"), such that the net
amount retained by Executive, before
accrual or payment of any Federal, state or
local income tax or employment tax, but
after accrual or payment of the Excise Tax
attributable to the Partial Gross-Up
Payment, is equal to the Excise Tax on the
Severance Payments.

(2) Subject to the provisions of Section
7(d)(iii), all determinations required to
be made under this Section 7, including
whether a Partial Gross-Up Payment is
required and the amount of such Partial
Gross-Up Payment, shall be made by Coopers
& Lybrand LLP or such other nationally
recognized accounting firm as may at that
time be the Company's independent public
accountants immediately prior to the Change
in Control (the "Accounting Firm"), which
shall provide detailed supporting
calculations both to the Company and
Executive within 15 business days of the
Date of Termination, if applicable, or at
such earlier time as is reasonably
requested by the Company or Executive. The
initial Partial Gross-Up Payment, if any,
as determined pursuant to this Section
7(d)(ii), shall be paid to Executive within
five days of the



receipt of the Accounting Firm's
determination. If the Accounting Firm
determines that no Excise Tax is payable by
Executive, the Company shall furnish
Executive with an opinion of counsel that
failure to report the Excise Tax on
Executive's applicable federal income tax
return would not result in the imposition
of a negligence or similar penalty. Any
determination by the Accounting Firm shall
be binding upon the Company and Executive.
As a result of the uncertainty in the
application of Section 4999 of the Code at
the time of the initial determination by
the Accounting Firm hereunder, it is
possible that Partial Gross-Up Payments
which will not have been made by the
Company should have been made (an
"Underpayment"). In the event that the
Company exhausts its remedies pursuant to
Section 7(d)(iii) and Executive thereafter
is required to make a payment of any Excise
Tax, the Accounting Firm shall determine
the amount of the Underpayment that has
occurred, consistent with the calculations
required to be made hereunder, and any such
Underpayment, and any interest and
penalties imposed on the Underpayment and
required to be paid by Executive in
connection with the proceedings described
in Section 7(d)(iii), and any related legal
and accounting expenses, shall be promptly
paid by the Company to or for the benefit
of Executive.

(3) Executive shall notify the Company in
writing of any claim by the Internal
Revenue Service that, if successful, would
require the payment by the Company of the
Partial Gross-Up Payment. Such notification
shall be given as soon as practicable but
no later than 10 business days after
Executive knows of such claim and shall
apprise the Company of the nature of such
claim and the date on which such claim is
requested to be paid. Executive shall not
pay such claim prior to the expiration of
the 30-day period following the date on
which he gives such notice to the Company
(or such shorter period ending on the date
that any payment of taxes with respect to
such claim is due). If the Company
notifies Executive in writing prior to the
expiration of such period that it desires
to contest such claim, Executive shall:

(a) give the Company any information
reasonably requested by the
Company relating to such claim,

(b) take such action in connection
with contesting such claim as the
Company shall reasonably request
in writing from




time to time, including, without
limitation, accepting legal
representation with respect to
such claim by an attorney selected
by the Company,

(c) cooperate with the Company in good
faith in order effectively to
contest such claim, and

(d) permit the Company to participate
in any proceedings relating to
such claim; provided, however that
the Company shall bear and pay
directly all costs and expenses
attributable to the failure to pay
the Excise Tax (including related
additional interest and penalties)
incurred in connection with such
contest and shall indemnify and
hold Executive harmless, for any
Excise Tax up to an amount not
exceeding the Partial Gross-Up
Payment, including interest and
penalties with respect thereto,
imposed as a result of such
representation, and payment of
related legal and accounting costs
and expenses (the "Indemnification
Limit"). Without limitation on the
foregoing provisions of this
Section 7(d)(iii), the Company
shall control all proceedings
taken in connection with such
contest and, at its sole option
may pursue or forego any and all
administrative appeals,
proceedings, hearings and
conferences with the taxing
authority in respect of such claim
and may, at its sole option,
either direct Executive to pay the
tax claimed and sue for a refund
or contest the claim in any
permissible manner, and Executive
agrees to prosecute such contest
to a determination before any
administrative tribunal, in a
court of initial jurisdiction and
in one or more appellate courts,
as the Company shall determine;
provided, however, that if the
Company directs Executive to pay
such claim and sue for a refund,
the Company shall advance so much
of the amount of such payment as
does not exceed the Excise Tax,
and related interest and
penalties, to Executive on an
interest-free basis and shall
indemnify and hold Executive
harmless, from any related legal
and accounting costs and expenses,
and from any Excise Tax, including
related interest or penalties
imposed with respect to such
advance or with respect to any
imputed income with respect to
such advance up to an amount not
exceeding the Indemnification
Limit; and further provided that
any extension of the statute of





limitations relating to payment of
taxes for the taxable year of
Executive with respect to which
such contested amount is claimed
to be due is limited solely to
such contested amount.
Furthermore, the Company's control
of the contest shall be limited to
issues with respect to which a
Partial Gross-Up Payment would be
payable hereunder and Executive
shall be entitled to settle or
contest, as the case may be, any
other issues raised by the
Internal Revenue Service or any
other taxing authority.

(4) If, after the receipt by Executive of an
amount advanced by the Company pursuant to
Section 7(d)(iii), Executive becomes
entitled to receive any refund with respect
to such claim, Executive shall (subject to
the Company's complying with the
requirements of Section 7(d)(iii)) promptly
pay to the Company so much of such refund
(together with any interest paid or
credited thereon after taxes applicable
thereto) (the "Refund") as is equal to (A)
if the Company advanced or paid the entire
amount required to be so advanced or paid
pursuant to Section 7(d)(iii) hereof (the
"Required Section 7(d) Advance"), the
aggregate amount advanced or paid by the
Company pursuant to this Section 7(d) less
the portion of such amount advanced to
Executive to reimburse him for related
legal and accounting costs, or (B) if the
Company advanced or paid less than the
Required Section 7(d) Advance, so much of
the aggregate amount so advanced or paid by
the Company pursuant to this Section 7(d)
as is equal to the difference, if any,
between (C) the amount refunded to
Executive with respect to such claim and
(D) the sum of the portion of the Required
Section 7(d) Advance that was paid by
Executive and not paid or advanced by the
Company plus Executive's related legal and
accounting fees, as applicable. If, after
the receipt by Executive of an amount
advanced by the Company pursuant to Section
7(d)(iii), a determination is made that
Executive shall not be entitled to any
refund with respect to such claim and the
Company does not notify Executive in
writing of its intent to contest such
denial of refund prior to the expiration of
30 days after such determination, then such
advance shall be forgiven and shall not be
required to be repaid and the amount of
such advance shall offset, to the extent
thereof, the amount of Partial Gross-Up
Payment required to be paid.

e. Notice of Termination. Notice of non-renewal of this
Agreement pursuant to



Section 1 hereof or of any termination of
Executive's employment (other than by reason of
death) shall be communicated by written notice (a
"Notice of Termination") from one party hereto to
the other party hereto in accordance with this
Section 7 and Section 9.

f. Date of Termination. "Date of Termination," with
respect to any termination of Executive's employment
during the Employment Period, shall mean (i) if
Executive's employment is terminated for Disability,
30 days after Notice of Termination is given
(provided that Executive shall not have returned to
the full-time performance of Executive's duties
during such 30 day period), (ii) if Executive's
employment is terminated for Cause, the date on
which a Notice of Termination is given which
complies with the requirements of Section 7(b)(1)
hereof, and (iii) if Executive's employment is
terminated for any other reason, the date specified
in the Notice of Termination. In the case of a
termination by the Company other than for Cause, the
Date of Termination shall not be less than 30 days
after the Notice of Termination is given. In the
case of a termination by Executive, the Date of
Termination shall not be less than 15 days from the
date such Notice of Termination is given.
Notwithstanding the foregoing, in the event that
Executive gives a Notice of Termination to the
Company, the Company may unilaterally accelerate the
Date of Termination and such acceleration shall not
result in the termination being treated as a
Termination without Cause. Upon any termination of
his employment, Executive will concurrently resign
his membership on the Board of Directors.

g. No Mitigation. The Company agrees that, if
Executive's employment by the Company is terminated
during the term of this Agreement, Executive is not
required to seek other employment, or to attempt in
any way to reduce any amounts payable to Executive
by the Company pursuant to Section 7(d)(i) hereof.
Further, the amount of any payment provided for in
this Agreement shall not be reduced by any
compensation earned by Executive as the result of
employment by another employer, by retirement
benefits, or, except for amounts then due and
payable in accordance with the terms of any
promissory notes given by Executive in favor of the
Company, by offset against any amount claimed to be
owed by Executive to the Company or otherwise.

h. Nature of Payments. The amounts due under this
Section 7 are in the nature of severance payments
considered to be reasonable by the Company and are
not in the nature of a penalty. Such amounts are in
full satisfaction of all claims Executive may have
in respect of his employment by the Company or its
affiliates and are provided as the sole and
exclusive benefits to be provided to Executive, his
estate, or his beneficiaries in respect of his
termination of employment from the Company or its
affiliates.






8. Non-Competition; Non-Solicitation; Specific Enforcement.

a. Non-Competition. Because Executive's services to the
Company are special and because Executive has access
to the Company's confidential information, Executive
covenants and agrees that, during the Employment
Period and, for a period of one year following the
Date of Termination by the Company for Cause or a
termination by Executive (other than a Constructive
Termination Without Cause) prior to a Change in
Control, Executive shall not, without the prior
written consent of the Board of Directors, become
associated with, or engage in any "Restricted
Activities" with respect to any "Competing
Enterprise," as such terms are hereinafter defined,
whether as an officer, employee, principal, partner,
agent, consultant, independent contractor or
shareholder. "Competing Enterprise," for purposes of
this Agreement, shall mean any person, corporation,
partnership, venture or other entity which (a) is a
publicly traded real estate investment trust, or (b)
is engaged in the business of managing, owning,
leasing or joint venturing residential real estate
within 30 miles of residential real estate owned or
under management by the Company or its affiliates.
"Restricted Activities," for purposes of this
Agreement, shall mean executive, managerial,
directorial, administrative, strategic, business
development or supervisory responsibilities and
activities relating to all aspects of residential
real estate ownership, management, residential real
estate franchising, and residential real estate
joint-venturing.

b. Non-Solicitation. During the Employment Period, and
for a period of one year following the Date of
Termination, Executive shall not, without the prior
written consent of the Company, except in the course
of carrying out his duties hereunder, solicit or
attempt to solicit for employment with or on behalf
of any corporation, partnership, venture or other
business entity, any employee of the Company or any
of its affiliates or any person who was formerly
employed by the Company or any of its affiliates
within the preceding six months, unless such
person's employment was terminated by the Company or
any of such affiliates.

c. Specific Enforcement. Executive and the Company
agree that the restrictions, prohibitions and other
provisions of this Section 8 are reasonable, fair
and equitable in scope, terms, and duration, are
necessary to protect the legitimate business
interests of the Company and are a material
inducement to the Company to enter into this
Agreement. Should a decision be made by a court of
competent jurisdiction that the character, duration
or geographical scope of the provisions of this
Section_8 is unreasonable, the parties intend and
agree that this Agreement shall be construed by the
court in such a manner as to impose all of those
restrictions on Executive's conduct that are
reasonable in light of the circumstances and as are
necessary to assure to the Company the benefits of
this Agreement. The Company and Executive further
agree that the services to be





rendered under this Agreement by Executive are
special, unique and of extraordinary character, and
that in the event of the breach by Executive of the
terms and conditions of this Agreement or if
Executive, without the prior consent of the Board of
Directors, shall take any action in violation of
this Section 8, the Company will suffer irreparable
harm for which there is no adequate remedy at law.
Accordingly, Executive hereby consents to the entry
of a temporary restraining order or ex parte
injunction, in addition to any other remedies
available at law or in equity, to enforce the
provisions hereof. Any proceeding or action seeking
equitable relief for violation of this Section 8
must be commenced in the federal or state courts, in
either case in Virginia. Executive and the Company
irrevocably and unconditionally submit to the
jurisdiction of such courts and agree to take any
and all future action necessary to submit to the
jurisdiction of such courts.

9. Notice. Any notice required or permitted hereunder shall be
in writing and shall be deemed sufficient when given by hand
or by nationally recognized overnight courier or by Express,
registered or certified mail, postage prepaid, return receipt
requested, and addressed, if to the Company at 5904 Richmond
Avenue, Alexandria, VA 22303, and if to Executive at the
address set forth in the Company's records (or to such other
address as may be provided by notice).

10. Miscellaneous. This Agreement, together with Annex A and
Annex B and the Split Dollar Insurance Agreement, constitutes
the entire agreement between the parties concerning the
subjects hereof and supersedes any and all prior agreements
or understandings, including, without limitation, any plan or
agreement providing benefits in the nature of severance, but
excluding benefits provided under other Company plans or
agreements, except to the extent this Agreement provides
greater rights than are provided under such other plans or
agreements. As of the Effective Date, this Agreement
supersedes the Prior Agreement which will have no further
force or effect. Executive hereby waives, to the extent
applicable, the effect of the transactions contemplated by
the Merger Agreement (or shareholder approval of such
transaction) on any change in control provisions in any
Avalon employee benefit plan or agreement. This Agreement
shall terminate upon termination of the Merger Agreement and
abandonment of the merger contemplated by the Merger
Agreement. This Agreement may not be assigned by Executive
without the prior written consent of the Company, and may be
assigned by the Company and shall be binding upon, and inure
to the benefit of, the Company's successors and assigns. The
Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the
Company to assume expressly and agree to perform this
Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession
had taken place. As used in this Agreement, "Company" shall
mean the Company as hereinbefore defined and any successor to
its



business and/or assets as aforesaid which assumes and agrees
to perform this Agreement by operation of law, or otherwise.
Headings herein are for convenience of reference only and
shall not define, limit or interpret the contents hereof.

11. Amendment. This Agreement may be amended, modified or
supplemented by the mutual consent of the parties in writing,
but no oral amendment, modification or supplement shall be
effective. No waiver by either party of any breach by the
other party of any condition or provision contained in this
Agreement to be performed by such other party shall be deemed
a waiver of a similar or dissimilar condition or provision at
the same or any prior or subsequent time. Any waiver must be
in writing and signed by Executive or an authorized officer
of the Company, as the case may be.

12. Severability. The provisions of this Agreement are severable.
The invalidity of any provision shall not affect the validity
of any other provision, and each provision of this Agreement
shall be valid and enforceable to the fullest extent
permitted by law.

13. Resolution of Disputes.

a. Procedures and Scope of Arbitration. Except for any
controversy or claim seeking equitable relief
pursuant to Section 8 of this Agreement, all
controversies and claims arising under or in
connection with this Agreement or relating to the
interpretation, breach or enforcement thereof and
all other disputes between the parties, shall be
resolved by expedited, binding arbitration, to be
held in Virginia in accordance with the National
Rules of the American Arbitration Association
governing employment disputes (the "National
Rules"). In any proceeding relating to the amount
owed to Executive in connection with his termination
of employment, it is the contemplation of the
parties that the only remedy that the arbitrator may
award in such a proceeding is an amount equal to the
termination payments, if any, required to be
provided under the applicable provisions of Section
7(c) and, if applicable, Section 7(d) hereof, to the
extent not previously paid, plus the costs of
arbitration and Executive's reasonable attorneys
fees and expenses as provided below. Any award made
by such arbitrator shall be final, binding and
conclusive on the parties for all purposes, and
judgment upon the award rendered by the arbitrator
may be entered in any court having jurisdiction
thereof.

b. Attorneys Fees.

(1) Reimbursement After Executive Prevails.
Except as otherwise provided in this
paragraph, each party shall pay the cost of
his or its own legal fees and expenses
incurred in connection with an arbitration
proceeding. Provided an award is made in
favor of



Executive in such proceeding, all of his
reasonable attorneys fees and expenses
incurred in pursuing or defending such
proceeding shall be promptly reimbursed to
Executive by the Company within five days
of the entry of the award.

(2) Reimbursement in Actions to Stay, Enjoin or
Collect. In any case where the Company or
any other person seeks to stay or enjoin
the commencement or continuation of an
arbitration proceeding, whether before or
after an award has been made, or where
Executive seeks recovery of amounts due
after an award has been made, or where the
Company brings any proceeding challenging
or contesting the award, all of Executive's
reasonable attorneys fees and expenses
incurred in connection therewith shall be
promptly reimbursed by the Company to
Executive, within five days of presentation
of an itemized request for reimbursement,
regardless of whether Executive prevails,
regardless of the forum in which such
proceeding is brought, and regardless of
whether a Change in Control has occurred.

(3) Reimbursement After a Change in Control.
Without limitation on the foregoing, solely
in a proceeding commenced by the Company or
by Executive after a Change in Control has
occurred, the Company shall advance to
Executive, within five days of presentation
of an itemized request for reimbursement,
all of Executive's legal fees and expenses
incurred in connection therewith,
regardless of the forum in which such
proceeding was commenced, subject to
delivery of an undertaking by Executive to
reimburse the Company for such advance if
he does not prevail in such proceeding
(unless such fees are to be reimbursed
regardless of whether Executive prevails as
provided in clause (ii) above).

14. Survivorship. The provisions of Sections 4(b), 6, 8 and 13 of this
Agreement shall survive Executive's termination of employment. Other
provisions of this Agreement shall survive any termination of
Executive's employment to the extent necessary to the intended
preservation of each party's respective rights and obligations.

15. Board Action. Where an action called for under this Agreement is
required to be taken by the Board of Directors, such action shall be
taken by the vote of not less than a majority of the members then in
office and authorized to vote on the matter.

16. Withholding. All amounts required to be paid by the Company shall be
subject to reduction in order to comply with applicable federal, state
and local tax withholding






requirements.

17. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original but all
of which together shall constitute one and the same instrument. The
execution of this Agreement may be by actual or facsimile signature.

18. Governing Law. This Agreement shall be construed and regulated in all
respects under the laws of the State of Maryland.




IN WITNESS WHEREOF, this Agreement is entered into as of the date and
year first above written.

Bay Apartment Communities, Inc.




By: /S/ GILBERT M. MEYER



Its: Chairman of the Board



/S/ THOMAS J. SARGEANT
Thomas J. Sargeant