| APARTMENT INVESTMENT & MANAGEMENT CO Item 1A Risk Factors The risk factors noted in this section and other factors noted throughout this Annual Report, describe certain risks and uncertainties that could cause our actual results to differ materially from those contained in any forward-looking statement |
| Our ability to make payments to our investors depends on our ability to generate net operating income in excess of required debt payments and capital expenditure requirements |
| Net operating income may be adversely affected by events or conditions beyond our control, including: • the general economic climate; • competition from other apartment communities and other housing options; • local conditions, such as loss of jobs or an increase in the supply of apartments, that might adversely affect apartment occupancy or rental rates; • changes in governmental regulations and the related cost of compliance; • increases in operating costs (including real estate taxes) due to inflation and other factors, which may not be offset by increased rents; • changes in tax laws and housing laws, including the enactment of rent control laws or other laws regulating multifamily housing; • changes in interest rates and the availability of financing; and • the relative illiquidity of real estate investments |
| 9 _________________________________________________________________ [61]Table of Contents If we are not able successfully to acquire, operate, redevelop and expand properties, our results of operations will be adversely affected |
| The selective acquisition, redevelopment and expansion of properties are components of our strategy |
| However, we may not be able to complete transactions successfully in the future |
| Although we seek to acquire, operate, redevelop and expand properties only when such activities increase our net income on a per share basis, such transactions may fail to perform in accordance with our expectations |
| When we redevelop or expand properties, we are subject to the risks that: • costs may exceed original estimates; • occupancy and rental rates at the property may be below our projections; • financing may not be available on favorable terms or at all; • redevelopment and leasing of the properties may not be completed on schedule; and • we may experience difficulty or delays in obtaining necessary zoning, land-use, building, occupancy and other governmental permits and authorizations |
| Our existing and future debt financing could render us unable to operate, result in foreclosure on our properties or prevent us from making distributions on our equity |
| Our strategy is generally to incur debt to increase the return on our equity while maintaining acceptable interest coverage ratios |
| For the year ended December 31, 2005, we had a ratio of free cash flow (net operating income less spending for capital replacements) to combined interest expense and preferred stock dividends of 1dtta4:1 |
| Our organizational documents do not limit the amount of debt that we may incur, and we have significant amounts of debt outstanding |
| Payments of principal and interest may leave us with insufficient cash resources to operate our properties or pay distributions required to be paid in order to maintain our qualification as a REIT We are also subject to the risk that our cash flow from operations will be insufficient to make required payments of principal and interest, and the risk that existing indebtedness may not be refinanced or that the terms of any refinancing will not be as favorable as the terms of existing indebtedness |
| If we fail to make required payments of principal and interest on secured debt, our lenders could foreclose on the properties securing such debt, which would result in loss of income and asset value to us |
| As of December 31, 2005, substantially all of the properties that we owned or controlled were encumbered by debt |
| Increases in interest rates would increase our interest expense |
| As of December 31, 2005, we had approximately dlra2cmam010dtta5 million of variable-rate indebtedness outstanding |
| Floating rate tax-exempt bond financing is benchmarked against the BMA Index, which since 1981 has averaged 68dtta0prca of 30-day LIBOR If this relationship continues, an increase in the 30-day LIBOR, of 1prca (0dtta68prca in tax-exempt interest rates) would result in our income before minority interests and cash flows being reduced by dlra17dtta8 million on an annual basis |
| This would be offset by variable rate interest income earned on certain assets, including cash and cash equivalents and notes receivable, as well as interest that is capitalized on a portion of this variable rate debt incurred in connection with our redevelopment activities |
| Considering these offsets, the same increase in the 30-day LIBOR would result in our income before minority interests being reduced by dlra8dtta9 million on an annual basis |
| Covenant restrictions may limit our ability to make payments to our investors |
| Some of our debt and other securities contain covenants that restrict our ability to make distributions or other payments to our investors unless certain financial tests or other criteria are satisfied |
| Our credit facility provides, among other things, that we may make distributions to our investors during any four consecutive fiscal quarters in an aggregate amount that does not exceed the greater of 95prca of our Funds From Operations for such period or such amount as may be necessary to maintain our REIT status |
| Our outstanding classes of preferred stock 10 _________________________________________________________________ [62]Table of Contents prohibit the payment of dividends on our Common Stock if we fail to pay the dividends to which the holders of the preferred stock are entitled |
| We depend on distributions and other payments from our subsidiaries that they may be prohibited from making to us |
| All of our properties are owned, and all of our operations are conducted, by the Aimco Operating Partnership and our other subsidiaries |
| As a result, we depend on distributions and other payments from our subsidiaries in order to satisfy our financial obligations and make payments to our investors |
| The ability of our subsidiaries to make such distributions and other payments depends on their earnings and may be subject to statutory or contractual limitations |
| As an equity investor in our subsidiaries, our right to receive assets upon their liquidation or reorganization will be effectively subordinated to the claims of their creditors |
| To the extent that we are recognized as a creditor of such subsidiaries, our claims may still be subordinate to any security interest in or other lien on their assets and to any of their debt or other obligations that are senior to our claims |
| We may be subject to litigation associated with partnership acquisitions that could increase our expenses and prevent completion of beneficial transactions |
| We have engaged in, and intend to continue to engage in, the selective acquisition of interests in partnerships that own apartment properties |
| In some cases, we have acquired the general partner of a partnership and then made an offer to acquire the limited partners’ interests in the partnership |
| In these transactions, we may be subject to litigation based on claims that we, as the general partner, have breached our fiduciary duty to our limited partners or that the transaction violates the relevant partnership agreement or state law |
| Although we intend to comply with our fiduciary obligations and the relevant partnership agreements, we may incur additional costs in connection with the defense or settlement of this type of litigation |
| In some cases, this type of litigation may adversely affect our desire to proceed with, or our ability to complete, a particular transaction |
| Any litigation of this type could also have a material adverse effect on our financial condition or results of operations |
| The marketplace for insurance coverage is uncertain and in some cases insurance is becoming more expensive and more difficult to obtain |
| The insurance market is characterized by volatility with respect to premiums, deductibles and coverage |
| Although we make use of many alternative methods of risk financing that enable us to insulate ourselves to some degree from variations in coverage and cost, sustained deterioration in insurance marketplace conditions may have a negative effect on our operating results |
| The FBI has issued alerts regarding potential terrorist threats involving apartment buildings |
| From time to time, the Federal Bureau of Investigation, or FBI, and the United States Department of Homeland Security issue alerts regarding potential terrorist threats involving apartment buildings |
| Threats of future terrorist attacks, such as those announced by the FBI and the Department of Homeland Security, could have a negative effect on rent and occupancy levels at our properties |
| The effect that future terrorist activities or threats of such activities could have on our business is uncertain and unpredictable |
| If we incur a loss at a property as a result of an act of terrorism, we could lose all or a portion of the capital we have invested in the property, as well as the future revenue from the property |
| We depend on our senior management |
| Our success depends upon the retention of our senior management, including Terry Considine, our chief executive officer and president |
| There are no assurances that we would be able to find qualified replacements for the individuals who make up our senior management if their services were no longer available |
| The loss of services of one or more members of our senior management team could have a material adverse effect on our business, financial condition and results of operations |
| We do not currently maintain key-man life insurance for any of our employees |
| The loss of any member of senior management could adversely affect our ability to pursue effectively our business strategy |
| 11 _________________________________________________________________ [63]Table of Contents Affordable housing regulations may limit the opportunities at some of our properties, reducing our revenue and, in some cases, causing us to sell properties that we might otherwise continue to own |
| We own an equity interest in certain affordable properties and manage for third parties and affiliates other properties that benefit from governmental programs intended to provide housing to people with low or moderate incomes |
| These programs, which are usually administered by HUD or state housing finance agencies, typically provide mortgage insurance, favorable financing terms or rental assistance payments to the property owners |
| As a condition of the receipt of assistance under these programs, the properties must comply with various requirements, which typically limit rents to pre-approved amounts |
| If permitted rents on a property are insufficient to cover costs, a sale of the property may become necessary, which could result in a loss of management fee revenue |
| We usually need to obtain the approval of HUD in order to manage, or acquire a significant interest in, a HUD-assisted property |
| Laws benefiting disabled persons may result in our incurrence of unanticipated expenses |
| Under the Americans with Disabilities Act of 1990, or ADA, all places intended to be used by the public are required to meet certain Federal requirements related to access and use by disabled persons |
| Likewise, the Fair Housing Amendments Act of 1988, or FHAA, requires apartment properties first occupied after March 13, 1990 to be accessible to the handicapped |
| These and other Federal, state and local laws may require modifications to our properties, or restrict renovations of the properties |
| Noncompliance with these laws could result in the imposition of fines or an award of damages to private litigants and also could result in an order to correct any non-complying feature, which could result in substantial capital expenditures |
| Although we believe that our properties are substantially in compliance with present requirements, we may incur unanticipated expenses to comply with the ADA and the FHAA We may fail to qualify as a REIT If we fail to qualify as a REIT, we will not be allowed a deduction for dividends paid to our stockholders in computing our taxable income, and we will be subject to Federal income tax at regular corporate rates, including any applicable alternative minimum tax |
| This would substantially reduce our funds available for payment to our investors |
| Unless entitled to relief under certain provisions of the Code, we also would be disqualified from taxation as a REIT for the four taxable years following the year during which we ceased to qualify as a REIT In addition, our failure to qualify as a REIT would trigger the following consequences: • we would be obligated to repurchase certain classes of our preferred stock; and • we would be in default under our primary credit facilities and certain other loan agreements |
| We believe that we operate, and have always operated, in a manner that enables us to meet the requirements for qualification as a REIT for Federal income tax purposes |
| Our continued qualification as a REIT will depend on our satisfaction of certain asset, income, investment, organizational, distribution, stockholder ownership and other requirements on a continuing basis |
| Our ability to satisfy the asset tests depends upon our analysis of the fair market values of our assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals |
| Our compliance with the REIT income and quarterly asset requirements also depends upon our ability to manage successfully the composition of our income and assets on an ongoing basis |
| Moreover, the proper classification of an instrument as debt or equity for Federal income tax purposes may be uncertain in some circumstances, which could affect the application of the REIT qualification requirements |
| Accordingly, there can be no assurance that the Internal Revenue Service, or the IRS, will not contend that our interests in subsidiaries or other issuers constitutes a violation of the REIT requirements |
| Moreover, future economic, market, legal, tax or other considerations may cause us to fail to qualify as a REIT, or our Board of Directors may determine to revoke our REIT status |
| REIT distribution requirements limit our available cash |
| As a REIT, we are subject to annual distribution requirements, which limit the amount of cash we retain for other business purposes, including amounts to fund our growth |
| We generally must distribute annually at least 12 _________________________________________________________________ [64]Table of Contents 90prca of our net REIT taxable income, excluding any net capital gain, in order for our distributed earnings not to be subject to corporate income tax |
| We intend to make distributions to our stockholders to comply with the requirements of the Code |
| However, differences in timing between the recognition of taxable income and the actual receipt of cash could require us to sell assets or borrow funds on a short-term or long-term basis to meet the 90prca distribution requirement of the Code |
| Limits on ownership of shares in our charter may result in the loss of economic and voting rights by purchasers that violate those limits |
| Our charter limits ownership of our Common Stock by any single stockholder (applying certain “beneficial ownership” rules under Federal securities laws) to 8dtta7prca of our outstanding shares of Common Stock, or 15prca in the case of certain pension trusts, registered investment companies and Mr |
| Our charter also limits ownership of our Common Stock and preferred stock by any single stockholder to 8dtta7prca of the value of the outstanding Common Stock and preferred stock, or 15prca in the case of certain pension trusts, registered investment companies and Mr |
| The charter also prohibits anyone from buying shares of our capital stock if the purchase would result in us losing our REIT status |
| This could happen if a transaction results in fewer than 100 persons owning all of our shares of capital stock or results in five or fewer persons (applying certain attribution rules of the Code) owning 50prca or more of the value of all of our shares of capital stock |
| If anyone acquires shares in excess of the ownership limit or in violation of the ownership requirements of the Code for REITs: • the transfer will be considered null and void; • we will not reflect the transaction on our books; • we may institute legal action to enjoin the transaction; • we may demand repayment of any dividends received by the affected person on those shares; • we may redeem the shares; • the affected person will not have any voting rights for those shares; and • the shares (and all voting and dividend rights of the shares) will be held in trust for the benefit of one or more charitable organizations designated by us |
| We may purchase the shares of capital stock held in trust at a price equal to the lesser of the price paid by the transferee of the shares or the then current market price |
| If the trust transfers any of the shares of capital stock, the affected person will receive the lesser of the price paid for the shares or the then current market price |
| An individual who acquires shares of capital stock that violate the above rules bears the risk that the individual: • may lose control over the power to dispose of such shares; • may not recognize profit from the sale of such shares if the market price of the shares increases; • may be required to recognize a loss from the sale of such shares if the market price decreases; and • may be required to repay to us any distributions received from us as a result of his or her ownership of the shares |
| Our charter may limit the ability of a third party to acquire control of us |
| The 8dtta7prca ownership limit discussed above may have the effect of precluding acquisition of control of us by a third party without the consent of our Board of Directors |
| Our charter authorizes our Board of Directors to issue up to 510cmam587cmam500 shares of capital stock |
| As of December 31, 2005, 426cmam157cmam976 shares were classified as Common Stock, of which 95cmam732cmam200 were outstanding, and 84cmam429cmam524 shares were classified as preferred stock, of which 38cmam324cmam762 were outstanding |
| Under our charter, our Board of Directors has the authority to classify and reclassify any of our unissued shares of capital stock into shares of capital stock with such preferences, rights, powers and restrictions as our Board of Directors may determine |
| The authorization and issuance of a new class 13 _________________________________________________________________ [65]Table of Contents of capital stock could have the effect of delaying or preventing someone from taking control of us, even if a change in control were in our stockholders’ best interests |
| Maryland business statutes may limit the ability of a third party to acquire control of us |
| As a Maryland corporation, we are subject to various Maryland laws that may have the effect of discouraging offers to acquire us and increasing the difficulty of consummating any such offers, even if an acquisition would be in our stockholders’ best interests |
| The Maryland General Corporation Law restricts mergers and other business combination transactions between us and any person who acquires beneficial ownership of shares of our stock representing 10prca or more of the voting power without our Board of Directors’ prior approval |
| Any such business combination transaction could not be completed until five years after the person acquired such voting power, and generally only with the approval of stockholders representing 80prca of all votes entitled to be cast and 66^2/3prca of the votes entitled to be cast, excluding the interested stockholder, or upon payment of a fair price |
| Maryland law also provides generally that a person who acquires shares of our capital stock that represent 10prca or more of the voting power in electing directors will have no voting rights unless approved by a vote of two-thirds of the shares eligible to vote |
| Additionally, Maryland law provides, among other things, that the board of directors has broad discretion in adopting stockholders’ rights plans and has the sole power to fix the record date, time and place for special meetings of the stockholders |
| In addition, Maryland law provides that corporations that: • have at least three directors who are not employees of the entity or related to an acquiring person; and • are subject to the reporting requirements of the Securities Exchange Act of 1934, may elect in their charter or bylaws or by resolution of the board of directors to be subject to all or part of a special subtitle that provides that: • the corporation will have a staggered board of directors; • any director may be removed only for cause and by the vote of two-thirds of the votes entitled to be cast in the election of directors generally, even if a lesser proportion is provided in the charter or bylaws; • the number of directors may only be set by the board of directors, even if the procedure is contrary to the charter or bylaws; • vacancies may only be filled by the remaining directors, even if the procedure is contrary to the charter or bylaws; and • the secretary of the corporation may call a special meeting of stockholders at the request of stockholders only on the written request of the stockholders entitled to cast at least a majority of all the votes entitled to be cast at the meeting, even if the procedure is contrary to the charter or bylaws |
| To date, we have not made any of the elections described above |