| RISK FACTORS Our operations involve various risks that could have adverse consequences, including those described below |
| This Item 1a includes forward-looking statements |
| You should refer to our discussion of the qualifications and limitations on forward-looking statements on page 61 |
| Development, redevelopment and construction risks could affect our profitability |
| We intend to continue to develop and redevelop apartment home communities |
| These activities may be exposed to the following risks: • we may be unable to obtain, or experience delays in obtaining, necessary zoning, occupancy, or other required governmental or third party permits and authorizations, which could result in increased costs or the delay or abandonment of opportunities; • we may abandon opportunities that we have already begun to explore for a number of reasons, including changes in local market conditions or increases in construction or financing costs, and, as a result, we may fail to recover expenses already incurred in exploring those opportunities; • we may incur costs that exceed our original estimates due to increased material, labor or other costs; • occupancy rates and rents at a community may fail to meet our expectations for a number of reasons, including changes in market and economic conditions beyond our control and the development by competitors of competing communities; • we may be unable to complete construction and lease up of a community on schedule, resulting in increased construction and financing costs and a decrease in expected rental revenues; • we may be unable to obtain financing with favorable terms, or at all, for the proposed development of a community, which may cause us to delay or abandon an opportunity; • we may incur liabilities to third parties during the development process, for example, in connection with managing existing improvements on the site prior to tenant terminations and demolition (such as commercial space) or in connection with providing services to third parties, such as the construction of shared infrastructure or other improvements; and • we may incur liability if our communities are not constructed and operated in compliance with the accessibility provisions of the Americans with Disabilities Acts or the Fair Housing Act |
| Noncompliance could result in imposition of fines, an award of damages to private litigants, and a requirement that we undertake structural modifications to remedy the noncompliance |
| We are currently engaged in a lawsuit alleging noncompliance with these statutes |
| See “Legal Proceedings |
| ” We project construction costs based on market conditions at the time we prepare our budgets, and our projections include changes that we anticipate but cannot predict with certainty |
| Construction costs have been increasing, particularly for materials such as steel, concrete and lumber, and, for some of our Development Communities and Development Rights, the total construction costs may be higher than the original budget |
| Total capitalized cost includes all capitalized costs projected to be incurred to develop or redevelop a community, determined in accordance with GAAP, including: • land and/or property acquisition costs; • construction or reconstruction costs; • costs of environmental remediation; • real estate taxes; • capitalized interest; • loan fees; • permits; • professional fees; • allocated development or redevelopment overhead; and • other regulatory fees |
| 7 _________________________________________________________________ Costs to redevelop communities that have been acquired have, in some cases, exceeded our original estimates and similar increases in costs may be experienced in the future |
| We cannot assure you that market rents in effect at the time new development or redevelopment communities complete lease-up will be sufficient to fully offset the effects of any increased construction or reconstruction costs |
| Unfavorable changes in market and economic conditions could hurt occupancy or rental rates |
| Local conditions in our markets significantly affect occupancy or rental rates at our communities |
| The risks that may adversely affect conditions in those markets include the following: • plant closings, industry slowdowns and other factors that adversely affect the local economy; • an oversupply of, or a reduced demand for, apartment homes; • a decline in household formation or employment or lack of employment growth; • the inability or unwillingness of residents to pay rent increases; and • rent control or rent stabilization laws, or other laws regulating housing, that could prevent us from raising rents to offset increases in operating costs |
| Changes in applicable laws, or noncompliance with applicable laws, could adversely affect our operations or expose us to liability |
| We must operate our communities in compliance with numerous federal, state and local laws and regulations, including landlord tenant laws and other laws generally applicable to business operations |
| Noncompliance with laws could expose us to liability |
| We are currently engaged in settling a lawsuit related to our handling of security deposits in California |
| ” Compliance with changes in (i) laws increasing the potential liability for environmental conditions existing on properties or the restrictions on discharges or other conditions, (ii) rent control or rent stabilization laws or (iii) other governmental rules and regulations or enforcement policies affecting the use and operation of our communities, including changes to building codes and fire and life-safety codes, may result in lower revenue growth or significant unanticipated expenditures |
| Short-term leases expose us to the effects of declining market rents |
| Substantially all of our apartment leases are for a term of one year or less |
| Because these leases generally permit the residents to leave at the end of the lease term without penalty, our rental revenues are impacted by declines in market rents more quickly than if our leases were for longer terms |
| Competition could limit our ability to lease apartment homes or increase or maintain rents |
| Our apartment communities compete with other housing alternatives to attract residents, including other rental apartments, condominiums and single-family homes that are available for rent, as well as new and existing condominiums and single-family homes for sale |
| Competitive residential housing in a particular area could adversely affect our ability to lease apartment homes and to increase or maintain rental rates |
| Attractive investment opportunities may not be available, which could adversely affect our profitability |
| We expect that other real estate investors, including insurance companies, pension funds, other REITs and other well-capitalized investors, will compete with us to acquire existing properties and to develop new properties |
| This competition could increase prices for properties of the type we would likely pursue and adversely affect our profitability |
| 8 _________________________________________________________________ Insufficient cash flow could affect our debt financing and create refinancing risk |
| We are subject to the risks associated with debt financing, including the risk that our cash flow will be insufficient to meet required payments of principal and interest |
| In this regard, we note that we are required to annually distribute dividends generally equal to at least 90prca of our REIT taxable income, computed without regard to the dividends paid deduction and our net capital gain, in order for us to continue to qualify as a REIT, and this requirement limits the amount of our cash flow available to meet required principal and interest payments |
| The principal outstanding balance on a portion of our debt will not be fully amortized prior to its maturity |
| Although we may be able to repay our debt by using our cash flows, we cannot assure you that we will have sufficient cash flows available to make all required principal payments |
| Therefore, we may need to refinance at least a portion of our outstanding debt as it matures |
| There is a risk that we may not be able to refinance existing debt or that a refinancing will not be done on as favorable terms, either of which could have a material adverse effect on our financial condition and results of operations |
| Rising interest rates could increase interest costs and could affect the market price of our common stock |
| We currently have, and may in the future incur, variable interest rate debt |
| Accordingly, if interest rates increase, our interest costs will also rise, unless we have made arrangements that hedge the risk of rising interest rates |
| In addition, an increase in market interest rates may lead purchasers of our common stock to demand a greater annual dividend yield, which could adversely affect the market price of our common stock |
| Bond financing and zoning compliance requirements could limit our income, restrict the use of communities and cause favorable financing to become unavailable |
| We have financed some of our apartment communities with obligations issued by local government agencies because the interest paid to the holders of this debt is generally exempt from federal income taxes and, therefore, the interest rate is generally more favorable to us |
| These obligations are commonly referred to as “tax-exempt bonds” and generally must be secured by communities |
| As a condition to obtaining tax-exempt financing, or on occasion as a condition to obtaining favorable zoning in some jurisdictions, we will commit to make some of the apartments in a community available to households whose income does not exceed certain thresholds (eg, 50prca or 80prca of area median income), or who meet other qualifying tests |
| As of December 31, 2005, approximately 6dtta1prca of our apartment homes at current operating communities were under use limitations such as these |
| These commitments, which may run without expiration or may expire after a period of time (such as 15 or 20 years) may limit our ability to raise rents aggressively and, in consequence, can also limit increases in the value of the communities subject to these restrictions |
| In addition, some of our tax-exempt bond financing documents require us to obtain a guarantee from a financial institution of payment of the principal of, and interest on, the bonds |
| The guarantee may take the form of a letter of credit, surety bond, guarantee agreement or other additional collateral |
| If the financial institution defaults in its guarantee obligations, or if we are unable to renew the applicable guarantee or otherwise post satisfactory collateral, a default will occur under the applicable tax-exempt bonds and the community could be foreclosed upon |
| Risks Related to Indebtedness |
| We have a dlra500cmam000cmam000 revolving variable rate unsecured credit facility with JPMorgan Chase Bank and Wachovia Bank, NA serving as banks and syndication agents for a syndicate of commercial banks, and Bank of America, serving as bank and administrative agent |
| The credit facility prohibits us from paying dividends in amounts that exceed 95prca of our funds from operations, provided that we may pay dividends in excess of 95prca of our funds from operations as required to maintain our qualification as a REIT Our organizational documents do not limit the amount or percentage of indebtedness that may be incurred |
| Accordingly, subject to compliance with outstanding debt covenants, we could incur more debt, resulting in an increased risk of default on our obligations and an increase in debt service requirements that could adversely affect our financial condition and results of operations |
| The mortgages on those of our properties subject to secured debt, our unsecured credit facility and the indentures under which a substantial portion of our debt was issued contain customary restrictions, requirements and other 9 _________________________________________________________________ limitations, as well as certain financial and operating covenants including maintenance of certain financial ratios |
| Maintaining compliance with these restrictions could limit our flexibility |
| A default in these requirements, if uncured, could result in a requirement that we repay indebtedness, which could severely affect our liquidity and increase our financing costs |
| Failure to generate sufficient revenue could limit cash flow available for distributions to stockholders |
| A decrease in rental revenue could have an adverse effect on our ability to pay distributions to our stockholders and our ability to maintain our status as a REIT Significant expenditures associated with each community such as debt service payments, if any, real estate taxes, insurance and maintenance costs are generally not reduced when circumstances cause a reduction in income from a community |
| Debt financing may not be available and equity issuances could be dilutive to our stockholders |
| Our ability to execute our business strategy depends on our access to an appropriate blend of debt and equity financing |
| Debt financing may not be available in sufficient amounts or on favorable terms |
| If we issue additional equity securities, the interests of existing stockholders could be diluted |
| Difficulty of selling apartment communities could limit flexibility |
| Federal tax laws may limit our ability to earn a gain on the sale of a community (unless we own it through a subsidiary which will incur a taxable gain upon sale) if we are found to have held, acquired or developed the community primarily with the intent to resell the community, and this limitation may affect our ability to sell communities without adversely affecting returns to our stockholders |
| In addition, real estate in our markets can at times be hard to sell, especially if market conditions are poor |
| These potential difficulties in selling real estate in our markets may limit our ability to change or reduce the apartment communities in our portfolio promptly in response to changes in economic or other conditions |
| Acquisitions may not yield anticipated results |
| Subject to the requirements related to the Fund discussed below, we may in the future acquire apartment communities on a select basis |
| Our acquisition activities and their success may be exposed to the following risks: • an acquired property may fail to perform as we expected in analyzing our investment; and • our estimate of the costs of repositioning or redeveloping an acquired property may prove inaccurate |
| Failure to succeed in new markets or in activities other than the development, ownership and operation of residential rental communities may have adverse consequences |
| We may from time to time commence development activity or make acquisitions outside of our existing market areas if appropriate opportunities arise |
| As noted in the business description above, we also own and operate retail space when a retail component represents the best use of the space, as is often the case with large urban in-fill developments |
| Also as noted in the business description above, we expect to develop, directly or through a joint venture partnership, one or more parcels with the intent to sell, which we believe represents the best use for those parcels |
| Our historical experience in our existing markets in developing, owning and operating rental communities does not ensure that we will be able to operate successfully in new markets, should we choose to enter them, or that we will be successful in these other activities |
| We may be exposed to a variety of risks if we choose to enter new markets, including an inability to evaluate accurately local apartment market conditions; an inability to obtain land for development or to identify appropriate acquisition opportunities; an inability to hire and retain key personnel; and lack of familiarity with local governmental and permitting procedures |
| We may be unsuccessful in owning and operating retail space at our communities or in developing real estate with the intent to sell |
| 10 _________________________________________________________________ Risks involved in real estate activity through joint ventures |
| Instead of acquiring or developing apartment communities directly, at times we invest as a partner or a co-venturer |
| Partnership or joint venture investments involve risks, including the possibility that our partner might become insolvent or otherwise refuse to make capital contributions when due; that we may be responsible to our partner for indemnifiable losses; that our partner might at any time have business goals which are inconsistent with ours; and that our partner may be in a position to take action or withhold consent contrary to our instructions or requests |
| Frequently, we and our partner may each have the right to trigger a buy-sell arrangement, which could cause us to sell our interest, or acquire our partner’s interest, at a time when we otherwise would not have initiated such a transaction |
| Risks associated with our discretionary investment fund |
| We have formed the Fund which, through a wholly-owned subsidiary, we manage as the general partner and to which we have committed dlra50cmam000cmam000, representing a 15dtta2prca equity interest |
| This presents risks, including the following: • investors in the Fund may fail to make their capital contributions when due and, as a result, the Fund may be unable to execute its investment objectives; • our subsidiary that is the general partner of the Fund is generally liable, under partnership law, for the debts and obligations of the Fund, subject to certain exculpation and indemnification rights pursuant to the terms of the partnership agreement of the Fund; • investors in the Fund holding a majority of the partnership interests may remove us as the general partner without cause, subject to our right to receive an additional nine months of management fees after such removal and our right to acquire one of the properties then held by the Fund; • while we have broad discretion to manage the Fund and make investment decisions on behalf of the Fund, the investors or an advisory committee comprised of representatives of the investors must approve certain matters, and as a result we may be unable to cause the Fund to make certain investments or implement certain decisions that we consider beneficial; • we are generally prohibited from making acquisitions of apartment communities outside of the Fund until the earlier of March 16, 2008 or until 80prca of the Fund’s committed capital is invested, subject to certain exceptions; and • we may be liable if either the Fund, or the REIT through which a number of investors have invested in the Fund and which we manage, fails to comply with various tax or other regulatory matters |