| ASSOCIATED ESTATES REALTY CORP Item 1A Risk Factors We are subject to certain risks and uncertainties as described below |
| These risks and uncertainties are not the only ones we face and there may be additional risks that we do not presently know of or that we currently consider immaterial |
| All of these risks could adversely affect our business, financial condition, results of operations and cash flows |
| Our ability to pay dividends on, and the market price of, our equity securities may be adversely affected if any of such risks are realized |
| We are subject to risks inherent in the ownership of real estate |
| We own and manage multifamily apartment communities that are subject to varying degrees of risk generally incident to the ownership of real estate |
| Our financial condition, the value of our properties and our ability to make distributions to our shareholders will be dependent upon our ability to operate our properties in a manner sufficient to generate income in excess of operating expenses and debt service charges, which may be affected by the following risks, some of which are discussed in more detail below: * changes in the economic climate in the markets in which we own and manage properties, including interest rates, the overall level of economic activity, the availability of consumer credit and mortgage financing, unemployment rates and other factors; * a lessening of demand for the multifamily units that we own or manage; * competition from other available multifamily units and changes in market rental rates; * increases in property and liability insurance costs; * changes in real estate taxes and other operating expenses (eg, cleaning, utilities, repair and maintenance costs, insurance and administrative costs, security, landscaping, staffing and other general costs); * changes in government regulations affecting properties the rents of which are subsidized and certain aspects of which are regulated by the United States Department of Housing and Urban Development ( "e HUD "e ) and other properties we own; * changes in or termination of contracts relating to our third party management and advisory business; * our inability to renew current contracts with HUD for rent-subsidized properties at existing rents; * weather and other conditions that might adversely affect operating expenses; * expenditures that cannot be anticipated, such as utility rate and usage increases, unanticipated repairs and real estate tax valuation reassessments or millage rate increases; * our inability to control operating expenses or achieve increases in revenues; * the results of litigation filed or to be filed against us; changes in tax legislation; * risks related to our joint ventures; * risks of personal injury claims and property damage related to mold claims because of diminished insurance coverage; catastrophic property damage losses that are not covered by our insurance; risks associated with property acquisitions such as environmental liabilities, among others; * changes in market conditions that may limit or prevent us from acquiring or selling properties; and * the perception of residents and prospective residents as to the attractiveness, convenience and safety of our properties or the neighborhoods in which they are located |
| We are dependent on rental income from our multifamily apartment communities |
| If we are unable to attract and retain residents or if our residents are unable to pay their rental obligations, our financial condition and funds available for distribution to our shareholders will be adversely affected |
| Our multifamily apartment communities are subject to competition |
| Our apartment communities are located in developed areas that include other apartment communities |
| Our apartment communities also compete with other housing alternatives, such as condominiums, single and multifamily rental homes and owner occupied single and multifamily homes, in attracting residents |
| This competition may affect our ability to attract and retain residents and to increase or maintain rental rates |
| The properties we own are primarily concentrated in Ohio, Michigan, Indiana, Pennsylvania, Florida and Georgia |
| As of December 31, 2005, approximately 55prca, 18prca, 5prca, 3prca, 8prca and 5prca of the units in properties we own are located in Ohio, Michigan, Indiana, Pennsylvania, Florida and Georgia, respectively |
| Our performance, therefore, is linked to economic conditions and the market for available rental housing in these states |
| The decline in the market for apartment housing in Ohio, or to a lesser extent, those other states, may adversely affect our financial condition, results of operations and ability to make distributions to our shareholders |
| We own or manage properties that are subject to government programs |
| As of December 31, 2005, we own directly or through subsidiaries or joint ventures 13 properties with 1cmam354 units and manage, through one or more affiliates, 32 properties with approximately 5cmam395 units, that benefit from some form of interest rate or rental subsidy and therefore are subject to governmental programs administered by HUD As a condition to the receipt of assistance under HUD programs, many of the properties must comply with various HUD requirements, which typically include maintenance of decent, safe and sanitary housing, HUD approval of rent adjustments, and, in the case of a HUD insured mortgage, approval of a transfer of the property |
| We can give no assurance that we will be able to renew current agreements with HUD at existing or higher rents |
| HUD requirements and other current and future laws regarding the provision of affordable housing, and any changes to existing law making it more difficult to meet such requirements, could adversely affect our results of operations, financial condition and ability to make distributions to our shareholders |
| Our insurance may not be adequate to cover certain risks |
| There are certain types of risks, generally of a catastrophic nature, such as earthquakes, floods, windstorms, act of war and terrorist attacks, that may be uninsurable, or are not economically insurable, or are not fully covered by insurance |
| Moreover, certain risks, such as mold and environmental exposures, generally are not covered by our insurance |
| Should an uninsured loss or a loss in excess of insured limits occur, we could lose our equity in the affected property as well as the anticipated future cash flow from that property |
| Any such loss could have a material adverse effect on our business, financial condition and results of operations |
| Debt financing could adversely affect our performance |
| A majority of our assets are encumbered by project specific, non-recourse, non-cross-collateralized mortgage debt |
| There is a risk that these properties will not have sufficient cash flow from operations for payments of required principal and interest |
| We may not be able to refinance these loans at an amount equal to the loan balance and the terms of any refinancing will not be as favorable as the terms of existing indebtedness |
| If we are unable to make required payments on indebtedness that is secured by a mortgage, the property securing the mortgage may be foreclosed with a consequent loss of income and value to us |
| Real estate investments are generally illiquid, and we may not be able to sell our properties when it is economically or strategically advantageous to do so |
| Real estate investments generally cannot be sold quickly, and our ability to sell properties may be affected by market conditions |
| We may not be able to diversify or vary our portfolio promptly in accordance with our strategies or in response to economic or other conditions |
| In addition, provisions of the Internal Revenue Code of 1986, as amended (the "e Code "e ) limit the ability of a REIT to sell its properties in some situations when it may be economically advantageous to do so, thereby potentially adversely affecting our ability to make distributions to our shareholders |
| Our access to public debt markets is limited |
| Substantially all of our debt financings are secured by mortgages on our properties because of our limited access to public debt markets |
| Revenues from third party management may further decline |
| Certain of our pension fund clients intend to sell properties we currently manage for them, thus we are likely to lose the property management fees and asset management fees associated with those properties if and when those properties are ultimately sold |
| We could lose a significant portion of our third party management revenues if that client failed to renew our management agreements for those properties |
| Fifty-nine percent of the properties we manage for third parties are owned or controlled by a single client |
| Litigation that may result in unfavorable outcomes |
| Like many real estate operators, we are frequently involved in lawsuits involving premises liability claims, housing discrimination claims and alleged violations of landlord-tenant laws, which may give rise to class action litigation or governmental investigations |
| Any material litigation not covered by insurance, such as a class action, could result in substantial costs being incurred |
| Our financial results may be adversely impacted if we are unable to sell properties and employ the proceeds in accordance with our strategic plan |
| Our ability to pay down debt, reduce our interest costs, buy back stock and acquire properties is dependent upon our ability to sell the properties we have selected for disposition at the prices and within the deadlines we have established for each respective property |
| The costs of complying with laws and regulations could adversely affect our cash flow and ability to make distributions to our shareholders |
| Our properties must comply with Title III of the Americans with Disabilities Act (the "e ADA "e ) to the extent that they are "e public accommodations "e or "e commercial facilities "e as defined in the ADA The ADA does not consider apartment communities to be public accommodations or commercial facilities, except for portions of such communities that are open to the public |
| In addition, the Fair Housing Amendments Act of 1988 (the "e FHAA "e ) requires apartment communities first occupied after March 13, 1990, to be accessible to the handicapped |
| Other laws also require apartment communities to be handicap accessible |
| Noncompliance with these laws could result in the imposition of fines or an award of damages to private litigants |
| We have been subject to lawsuits alleging violations of handicap design laws in connection with certain of our developments |
| If compliance with these laws involves substantial expenditures or must be made on an accelerated basis, our ability to make distributions to our shareholders could be adversely affected |
| Under various federal, state and local laws, an owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on, under or in the property |
| This liability may be imposed without regard to whether the owner or operator knew of, or was responsible for, the presence of the substances |
| Other law imposes on owners and operators certain requirements regarding conditions and activities that may affect human health or the environment |
| Failure to comply with applicable requirements could complicate our ability to lease or sell an affected property and could subject us to monetary penalties, costs required to achieve compliance and potential liability to third parties |
| We are not aware of any material noncompliance, liability or claim relating to hazardous or toxic substances or other environmental matters in connection with any of our properties |
| Nonetheless, it is possible that material environmental contamination or conditions exist, or could arise in the future, in the apartment communities or on the land upon which they are located |
| We are subject to the risks associated with investments through joint ventures |
| Two of our properties are owned by joint ventures in which we do not have a controlling interest |
| We may enter into joint ventures, including joint ventures that we do not control, in the future |
| Any joint venture investment involves risks such as the possibility that the co-venturer may seek relief under federal or state insolvency laws, or have economic or business interests or goals that are inconsistent with our business interests or goals |
| While the bankruptcy or insolvency of our co-venturer generally should not disrupt the operations of the joint venture, we could be forced to purchase the co-venturerapstas interest in the joint venture or the interest could be sold to a third party |
| We also may guarantee the indebtedness of our joint ventures |
| If we do not have control over a joint venture, the value of our investment may be affected adversely by a third party that may have different goals and capabilities than ours |
| We are subject to risks associated with development, acquisition and expansion of multifamily apartment communities |
| Development projects and acquisitions and expansions of apartment communities are subject to a number of risks, including: * availability of acceptable financing; * competition with other entities for investment opportunities; * failure by our properties to achieve anticipated operating results; * construction costs of a property exceeding original estimates; * delays in construction; and * expenditure of funds on, and the devotion of management time to, transactions that may not come to fruition |
| We may fail to qualify as a REIT and you may incur tax liability as a result |
| Commencing with our taxable year ending December 31, 1993, we have operated in a manner so as to permit us to qualify as a REIT under the Code, and we intend to continue to operate in such a manner |
| Although we believe that we will continue to operate as a REIT, no assurance can be given that we will remain qualified as a REIT If we were to fail to qualify as a REIT in any taxable year, we would not be allowed a deduction for distributions to our shareholders in computing our taxable income and would be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates |
| Unless we are entitled to relief under certain Code provisions, we also would be disqualified from treatment as a REIT for the four taxable years following the year during which REIT qualification was lost |
| As a result, the cash available for distribution to our shareholders could be reduced or eliminated for each of the years involved |
| Our ownership limit may discourage takeover attempts |
| With certain limited exceptions, our Second Amended and Restated Articles of Incorporation, as amended and supplemented to date, prohibit the ownership of more than 4dtta0prca of the outstanding common shares and more than 9dtta8prca of the shares of any series of any class of our preferred shares by any person |
| These restrictions are likely to have the effect of precluding acquisition of control of us without our consent even if a change in control is in the interests of shareholders |
| We are subject to control by our directors and officers |
| Our directors and executive officers and members of their family owned approximately 18dtta0prca of our common shares as of December 31, 2005 |
| Accordingly, those persons have substantial influence over us and the outcome of matters submitted to our shareholders for approval |
| We depend on our key personnel |
| Our success depends to a significant degree upon the continued contribution of key members of our management team, who may be difficult to replace |
| The loss of services of these executives could have a material adverse effect on us |
| There can be no assurance that the services of such personnel will continue to be available to us |
| Jeffrey I Friedman, Associated Estates &apos Chairman of the Board, President and Chief Executive Officer, is a party to an employment agreement with Associate Estates |
| We do not hold key-man life insurance on any of our key personnel |
| sec#Item 1A Risk Factors |