| ESSEX PROPERTY TRUST INC Item 1A Risk Factors Our business, operating results, cash flows and financial conditions are subject to various risks and uncertainties, including, without limitation, those set forth below, any one of which could cause our actual results to vary materially from recent results or form our anticipated future results |
| We depend on our key personnel - Our success depends on our ability to attract and retain executive officers, senior officers and company managers |
| There is substantial competition for qualified personnel in the real estate industry and the loss of several of our key personnel could have an adverse effect on us |
| Debt financing - At December 31, 2005, we had approximately dlra1dtta35 billion of indebtedness (including dlra186dtta7 million of variable rate indebtedness, of which dlra152dtta7 million is subject to interest rate protection agreements) |
| We are subject to the risks normally associated with debt financing, including the following: · cash flow may not be sufficient to meet required payments of principal and interest; · inability to refinance maturing indebtedness on encumbered properties; · the terms of any refinancing may not be as favorable as the terms of existing indebtedness; · inability to comply with debt covenants could cause an acceleration of the maturity date; and · repaying debt before the scheduled maturity date could result in prepayment penalties |
| Uncertainty of our ability to refinance balloon payments - As of December 31, 2005, we had approximately dlra1dtta35 billion of mortgage debt, exchangeable bonds and line of credit borrowings, most of which are subject to balloon payments |
| We do not expect to have sufficient cash flows from operations to make all of these balloon payments |
| These mortgages, bonds and lines of credit borrowings have the following scheduled principal and balloon payments: 2006--dlra26dtta2 million; 2007--dlra82dtta0 million; 2008--dlra155dtta7 million; 2009--dlra34dtta4 million; 2010--dlra159dtta3 million; Thereafter--dlra872dtta2 million |
| We may not be able to refinance such mortgage indebtedness, bonds, or lines of credit |
| The Properties subject to these mortgages could be foreclosed upon or otherwise transferred to the lender |
| This could cause us to lose income and asset value |
| We may be required to refinance the debt at higher interest rates or terms of such refinancing may not be as favorable as the terms of existing indebtedness |
| Debt financing on properties may result in insufficient cash flow - Where possible, we intend to continue to use leverage to increase the rate of return on our investments and to provide for additional investments that we could not otherwise make |
| There is a risk that the cash flow from the properties will be insufficient to meet both debt payment obligations and the distribution requirements of the real estate investment trust provisions of the Internal Revenue Code |
| We may obtain additional debt financing in the future, through mortgages on some or all of the properties |
| These mortgages may be recourse, non-recourse, or cross-collateralized |
| As of December 31, 2005, Essex had 72 of its 120 consolidated multifamily properties encumbered by debt |
| The holders of this indebtedness will have a claim against these properties and, to the extent indebtedness is cross-collateralized, lenders may seek to foreclose upon properties, which are not the primary collateral for their loan |
| This may accelerate other indebtedness secured by properties |
| Foreclosure of properties would reduce our income and asset value |
| Risk of rising interest rates - Current interest rates are at historic lows and could potentially increase rapidly, which could result in higher interest expense on our variable rate indebtedness |
| Prolonged interest rate increases could negatively impact our ability to make acquisitions and develop properties at economic returns on investment and our ability to refinance existing borrowings at acceptable rates |
| As of December 31, 2005, we had approximately dlra186dtta7 million of long-term variable rate indebtedness bearing interest at floating rates tied to the rate of short-term tax-exempt revenue bonds (which mature at various dates from 2020 through 2034), and dlra25dtta0 million of variable rate indebtedness under our lines of credit, bearing interest at the Freddie Mac Reference Rate plus from 0dtta55prca to 0dtta59prca |
| 7 _________________________________________________________________ Approximately dlra152dtta7 million of the long-term indebtedness is subject to interest rate cap protection agreements, which may reduce the risks associated with fluctuations in interest rates |
| The remaining dlra34dtta0 million of long-term variable rate indebtedness was not subject to any interest rate cap protection agreements as of December 31, 2005 |
| An increase in interest rates may have an adverse effect on our net income and results of operations |
| Risk of losses on interest rate hedging arrangement - Periodically, we have entered into agreements to reduce the risks associated with increases in interest rates, and may continue to do so |
| Although these agreements may partially protect against rising interest rates, they also may reduce the benefits to us if interest rates decline |
| If a hedging arrangement is not indexed to the same rate as the indebtedness that is hedged, we may be exposed to losses to the extent that the rate governing the indebtedness and the rate governing the hedging arrangement change independently of each other |
| Finally, nonperformance by the other party to the hedging arrangement may subject us to increased credit risks |
| In order to minimize counterparty credit risk, our policy is to enter into hedging arrangements only with large financial institutions |
| Bond compliance requirements may limit income from certain properties - At December 31, 2005, we had approximately dlra186dtta7 million of variable rate tax-exempt financing relating to the Inglenook Court Apartments, Wandering Creek Apartments, Treetops Apartments, Huntington Breakers Apartments, Camarillo Oaks Apartments, Fountain Park, Anchor Village and Parker Ranch Apartments |
| This tax-exempt financing subjects these properties to certain deed restrictions and restrictive covenants |
| In addition, the Internal Revenue Code and rules and regulations thereunder impose various restrictions, conditions and requirements excluding interest on qualified bond obligations from gross income for federal income tax purposes |
| The Internal Revenue Code also requires that at least 20prca of apartment units be made available to residents with gross incomes that do not exceed a specified percentage, generally 50prca, of the median income for the applicable family size as determined by the Housing and Urban Development Department of the federal government |
| In addition to federal requirements, certain state and local authorities may impose additional rental restrictions |
| These restrictions may limit income from the tax-exempt financed properties if we are required to lower rental rates to attract residents who satisfy the median income test |
| If Essex does not reserve the required number of apartment homes for residents satisfying these income requirements, the tax-exempt status of the bonds may be terminated, the obligations under the bond documents may be accelerated and we may be subject to additional contractual liability |
| Adverse effect to property income and value due to general real estate investment risks - Real property investments are subject to a variety of risks |
| The yields available from equity investments in real estate depend on the amount of income generated and expenses incurred |
| If the properties do not generate sufficient income to meet operating expenses, including debt service and capital expenditures, cash flow and the ability to make distributions to stockholders will be adversely affected |
| The performance of the economy in each of the areas in which the properties are located affects occupancy, market rental rates and expenses |
| Consequently, the income from the properties and their underlying values may be impacted |
| The financial results of major local employers may have an impact on the cash flow and value of certain of the properties as well |
| Income from the properties may be further adversely affected by, among other things, the following factors: · the general economic climate; · local economic conditions in which the properties are located, such as oversupply of housing or a reduction in demand for rental housing; · the attractiveness of the properties to tenants; · competition from other available space; and · Essex’s ability to provide for adequate maintenance and insurance |
| As leases on the properties expire, tenants may enter into new leases on terms that are less favorable to us |
| Income and real estate values also may be adversely affected by such factors as applicable laws (eg, the Americans With Disabilities Act of 1990 and tax laws), interest rate levels and the availability and terms of financing |
| Real estate investments are relatively illiquid and, therefore, our ability to vary our portfolio promptly in response to changes in economic or other conditions may be quite limited |
| Economic environment and impact on operating results - The national economy and the economies of the western states in markets where we operate can impact our operating results |
| Some of these markets are concentrated in high-tech sectors, which have experienced economic downturns, and could again in the future |
| Our property type and diverse geographic locations provide some degree of risk mitigation |
| However, we are not immune to prolonged economic downturns |
| Although we believe we are well positioned to meet these challenges, it is possible a reduction in rental rates, occupancy levels, property valuations and increases in operating costs such as advertising, turnover and repair and maintenance expense could occur in the event of economic uncertainty |
| 8 _________________________________________________________________ Risk of Inflation/Deflation - Substantial inflationary or deflationary pressures could have a negative effect on rental rates and property operating expenses |
| Risks that acquisitions will fail to meet expectations - We intend to continue to acquire multifamily residential properties |
| However, there are risks that acquisitions will fail to meet our expectations |
| Our estimates of future income, expenses and the costs of improvements or redevelopment that are necessary to allow us to market an acquired property as originally intended may prove to be inaccurate |
| We expect to finance future acquisitions, in whole or in part, under various forms of secured or unsecured financing or through the issuance of partnership units by the Operating Partnership or related partnerships or additional equity by Essex |
| The use of equity financing, rather than debt, for future developments or acquisitions could dilute the interest of Essex’s existing stockholders |
| If we finance new acquisitions under existing lines of credit, there is a risk that, unless we obtain substitute financing, Essex may not be able to secure further lines of credit for new development or such lines of credit may be not available on advantageous terms |
| Risks that development activities will be delayed, not completed, and/or not achieve expected results - These risks may reduce the funds available for distribution to Essex’s stockholders |
| Further, the development of properties is also subject to the general risks associated with real estate investments |
| For further information regarding these risks, please see “Adverse Effect to Property Income and Value Due to General Real Estate Investment Risks |
| ” We pursue multifamily residential property development projects and these projects generally require various governmental and other approvals, which have no assurance of being received |
| Our development activities generally entail certain risks, including the following: · funds may be expended and managementapstas time devoted to projects that may not be completed; · construction costs of a project may exceed original estimates, possibly making the project economically unfeasible; · development projects may be delayed due to, without limitation, adverse weather conditions, labor shortages, or unforeseen complications; · occupancy rates and rents at a completed project may be less than anticipated; and · costs at a completed development may be higher than anticipated |
| The geographic concentration of our Properties and fluctuations in local markets may adversely impact our financial condition and operating results - We generated significant amounts of rental revenues for the year ended December 31, 2005 from properties concentrated in Southern California (Los Angeles, Ventura, Orange, San Diego and Riverside counties), Northern California (the San Francisco Bay Area), and the Pacific Northwest (the Seattle, Washington and Portland, Oregon metropolitan areas) |
| As of December 31, 2005, more than half (73prca) of our Properties were located in California |
| This geographic concentration could present risks if local property market performance falls below expectations |
| The economic condition of these markets could affect occupancy, market rental rates, and expenses, as well as impact the income generated from the Properties and their underlying asset values |
| The financial results of major local employers also may impact the cash flow and value of certain of the Properties |
| This could have a negative impact on our financial condition and operating results, which could affect our ability to pay expected dividends to our stockholders |
| Competition in the multifamily residential market may adversely affect operations and the rental demand for our Properties - There are numerous housing alternatives that compete with our multifamily properties in attracting residents |
| These include other multifamily rental apartments and single-family homes that are available for rent in the markets in which the Properties are located |
| The Properties also compete for residents with new and existing homes and condominiums that are for sale |
| If the demand for our Properties is reduced or if competitors develop and/or acquire competing properties on a more cost-effective basis, rental rates may drop, which may have a material adverse affect on our financial condition and results of operations |
| We also face competition from other real estate investment trusts, businesses and other entities in the acquisition, development and operation of properties |
| Some of the competitors are larger and have greater financial resources than we do |
| This competition may result in increased costs of properties we acquire and/or develop |
| Dividend requirements as a result of preferred stock may lead to a possible inability to sustain dividends - The Company has approximately dlra25 million of Series F Cumulative Redeemable Preferred Stock (“Series F Preferred Stock”) outstanding |
| The Series B Preferred Units, the Series D Preferred Units, and the Series F Preferred Stock are collectively referred to as the “Preferred Equity” |
| The terms of the Series F Preferred Stock and of the preferred stock into which each series of Preferred Units are exchangeable provide for certain cumulative preferential cash distributions per each share of preferred stock |
| 9 _________________________________________________________________ These terms also provide that while such preferred stock is outstanding, Essex cannot authorize, declare, or pay any distributions on the Common Stock, unless all distributions accumulated on all shares of such preferred stock have been paid in full |
| The distributions payable on such preferred stock may impair Essex’s ability to pay dividends on its Common Stock |
| If Essex wishes to issue any Common Stock in the future (including, upon exercise of stock options), the funds required to continue to pay cash dividends at current levels will be increased |
| Essex’s ability to pay dividends will depend largely upon the performance of the Properties and other properties that may be acquired or developed in the future |
| If Essex cannot pay dividends on its stock, Essex’s status as a real estate investment trust may be jeopardized |
| Our ability to pay dividends on our common stock is further limited by the Maryland General Corporation Law |
| Under the Maryland General Corporation Law, Essex may not make a distribution on stock if, after giving effect to such distribution, either: · we would not be able to pay our indebtedness as it becomes due in the usual course of business; or · our total assets would be less than our total liabilities |
| Resale of shares pursuant to our effective registration statement may have an adverse effect on the market price of the shares - Pursuant to the acquisition of John M Sachs, Inc, a real estate company, in December 2002, we issued 2cmam719cmam875 shares of common stock, as partial consideration for the acquisition, to the trusts that were the shareholders of that company |
| In connection with the acquisition, Essex entered into a registration rights agreement with these trusts, pursuant to which in January 2003 we filed a registration statement on Form S-3 in order to enable the resale of these shares of common stock |
| In an amendment to this registration statement filed in April 2003, we also registered, pursuant to certain registration rights, 50cmam000 shares of common stock which are issuable to the trusts in connection with certain contractual obligations and 2cmam270cmam490 shares of common stock which are issuable upon exchange of limited partnership interests in the Operating Partnership |
| These limited partnership interests are held by senior members of our management, certain members of our Board of Directors and certain outside investors, or the Operating Partnership holders, and comprise approximately 9dtta6prca of the limited partnership interests of the Operating Partnership as of December 31, 2005 |
| In the 2003 registration statement, we registered, pursuant to certain registration rights, 1cmam473cmam125 shares of common stock, which are issuable upon redemption of all of the limited partnership interests in such real estate partnerships |
| In total, this 2003 registration statement covers in aggregate 6cmam513cmam490 shares of our common stock |
| In January 2006, we filed registration statements that cover (1) the resale of up to 142cmam076 shares issuable in connection with our Waterford and Vista Belvedere acquisitions and (2) the resale of shares issuable in connection with the exchange rights of our 3dtta625prca Senior Exchangeable Notes, as to which there is a principal amount of dlra225 million outstanding |
| The resale of the shares of common stock pursuant to these various registration statements may have an adverse effect on the market price of our shares |
| The exchange and repurchase rights of Exchangeable Senior Notes may be detrimental to holders of common stock - The Operating Partnership has dlra225 million principal amount of 3dtta625prca Exchangeable Senior Notes (the “Notes”) outstanding which mature on November 1, 2025 |
| The Notes are exchangeable into the Companyapstas common shares on or after November 1, 2020 or prior to November 1, 2020 under certain circumstances |
| The Notes are redeemable at the Companyapstas option for cash at any time on or after November 4, 2010 and are subject to repurchase for cash at the option of the holder on November 1^st in the years 2010, 2015 and 2020, or upon the occurrence of certain events |
| The Notes are senior unsecured and unsubordinated obligations of the Company |
| The exchange of Notes for common stock would dilute stockholder ownership in the Company, and could adversely affect the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities |
| If the Notes are not exchanged, the repurchase rights of holder of the Notes may discourage or impede transactions that might otherwise be in the interest of holders of common stock |
| Further, these repurchase rights might be triggered in situations where Essex needs to conserve its cash reserves, in which event such repurchase might adversely affect Essex and its common holders |
| Our Chairman is involved in other real estate activities and investments, which may lead to conflicts of interest - Our Chairman, George M Marcus is not an employee of Essex, and is involved in other real estate activities and investments, which may lead to conflicts of interest |
| Marcus owns interests in various other real estate-related businesses and investments |
| He is the Chairman of The Marcus & Millichap Company, or “TMMC”, which is a holding company for certain real estate brokerage and services companies |
| TMMC has an interest in Pacific Property Company, a company that invests in West Coast multifamily residential properties |
| In 1999 we sold an office building to TMMC, which Essex previously occupied as its corporate headquarters |
| Marcus has agreed not to divulge any information that may be received by him in his capacity as Chairman of Essex to any of his affiliated companies and that he will abstain his vote on any and all resolutions by the Essex Board of Directors regarding any proposed acquisition and/or development of a multifamily property where it appears that there may be a conflict of interest with any of his affiliated companies |
| 10 _________________________________________________________________ Notwithstanding this agreement, Mr |
| Marcus and his affiliated entities may potentially compete with us in acquiring and/or developing multifamily properties, which competition may be detrimental to us |
| In addition, due to such potential competition for real estate investments, Mr |
| Marcus and his affiliated entities may have a conflict of interest with us, which may be detrimental to the interests of Essex’s stockholders |
| The influence of executive officers, directors and significant stockholders may be detrimental to holders of common stock - As of December 31, 2005, George M Marcus, the Chairman of our Board of Directors, wholly or partially owned 1cmam752cmam111 shares of common stock (including shares issuable upon exchange of limited partnership interests in the Operating Partnership and certain other partnerships and assuming exercise of all vested options) |
| This represents approximately 7dtta6prca of the outstanding shares of our common stock |
| Marcus currently does not have majority control over us |
| However, he currently has, and likely will continue to have, significant influence with respect to the election of directors and approval or disapproval of significant corporate actions |
| Consequently, his influence could result in decisions that do not reflect the interests of all our stockholders |
| Under the partnership agreement of the Operating Partnership, the consent of the holders of limited partnership interests is generally required for any amendment of the agreement and for certain extraordinary actions |
| Through their ownership of limited partnership interests and their positions with us, our directors and executive officers, including Mr |
| Marcus and Mr |
| William A Millichap, a director of Essex, have substantial influence on us |
| Consequently, their influence could result in decisions that do not reflect the interests of all stockholders |
| The voting rights of preferred stock may allow holders of preferred stock to impede actions that otherwise benefit holders of common stock - In general, the holders of Series F Preferred stock and of the preferred stock into which our preferred units are exchangeable do not have any voting rights |
| However, if full distributions are not made on any outstanding preferred stock for six quarterly distributions periods, the holders of preferred stock who have not received distributions, voting together as a single class, will have the right to elect two additional directors to serve on Essex’s Board of Directors |
| These voting rights continue until all distributions in arrears and distributions for the current quarterly period on the preferred stock have been paid in full |
| At that time, the holders of the preferred stock are divested of these voting rights, and the term and office of the directors so elected immediately terminates |
| These voting rights of the preferred stock may allow holders of preferred stock to impede or veto actions that would otherwise benefit the holders of Essex’s Common Stock |
| While any shares of Series F Preferred Stock or shares of preferred stock into which the preferred units are exchangeable are outstanding, Essex may not, without the consent of the holders of two-thirds of the outstanding shares of each series of preferred stock, each voting separately as a single class; · authorize or create any class of series of stock that ranks senior to such preferred stock with respect to the payment of dividends, rights upon liquidation, dissolution or winding-up of our business; · amend, alter or repeal the provisions of Essex’s Charter or Bylaws, that would materially and adversely affect the rights of such preferred stock; or · in the case of the preferred stock into which our preferred units are exchangeable, merge or consolidate with another entity or transfer substantially all of its assets to another entity, except if such preferred stock remains outstanding with the surviving entity and has the same terms and in certain other circumstances |
| The redemption rights of the Series B preferred units, Series D preferred units and Series F preferred stock may be detrimental to holders of Essex common stock - Upon the occurrence of one of the following events, the terms of the Operating Partnership’s Series B and D Preferred Units require it to redeem all of such units and the terms of Essex’s Series F Preferred Stock provide the holders of the majority of the outstanding Series F Preferred Stock the right to require Essex to redeem all of such stock: · Essex completes a “going private” transaction and its common stock is no longer registered under the Securities Exchange Act of 1934, as amended; · Essex completes a consolidation or merger or sale of substantially all of its assets and the surviving entity’s debt securities do not possess an investment grade rating; or · Essex fails to qualify as a REIT The aggregate redemption price of the Series B Preferred Units would be dlra80 million, the aggregate redemption price of the Series D Preferred Units would be dlra50 million and the aggregate redemption price of the Series F Preferred Stock would be dlra25 million, plus, in each case, any accumulated distributions |
| 11 _________________________________________________________________ These redemption rights may discourage or impede transactions that might otherwise be in the interest of holders of common stock |
| Further, these redemption rights might trigger situations where Essex needs to conserve its cash reserves, in which event such redemption might adversely affect Essex and its common holders |
| Maryland business combination law may not allow certain transactions between Essex and its affiliates to proceed without compliance with such law - The Maryland General Corporation Law establishes special requirements for “business combinations” between a Maryland corporation and “interested stockholders” unless exemptions are applicable |
| An interested stockholder is any person who beneficially owns ten percent or more of the voting power of the then-outstanding voting stock |
| The law also requires a supermajority stockholder vote for such transactions |
| This means that the transaction must be approved by at least: · 80prca of the votes entitled to be cast by holders of outstanding voting shares; and · 66prca of the votes entitled to be cast by holders of outstanding voting shares other than shares held by the interested stockholder with whom the business combination is to be effected |
| However, as permitted by the statute, the Board of Directors of Essex irrevocably has elected to exempt any business combination by us, George M Marcus, William A Millichap, who are the chairman and a director of Essex, respectively, and TMMC or any entity owned or controlled by Messrs |
| Marcus and Millichap and TMMC Consequently, the super-majority vote requirement described above will not apply to any business combination between us and Mr |
| Millichap, or TMMC As a result, we may in the future enter into business combinations with Messrs |
| Marcus and Millichap and TMMC, without compliance with the super-majority vote requirements and other provisions of the Maryland General Corporation Law |
| Anti-takeover provisions contained in the Operating Partnership agreement, charter, bylaws, and certain provisions of Maryland law could delay, defer or prevent a change in control - While Essex is the sole general partner of the Operating Partnership, and generally has full and exclusive responsibility and discretion in the management and control of the Operating Partnership, certain provisions of the Operating Partnership agreement place limitations on Essex’s ability to act with respect to the Operating Partnership |
| Such limitations could delay, defer or prevent a transaction or a change in control that might involve a premium price for our stock or otherwise be in the best interest of the stockholders or that could otherwise adversely affect the interest of Essex’s stockholders |
| The partnership agreement provides that if the limited partners own at least 5prca of the outstanding units of limited partnership interest in the Operating Partnership, Essex cannot, without first obtaining the consent of a majority-in-interest of the limited partners in the Operating Partnership, transfer all or any portion of our general partner interest in the Operating Partnership to another entity |
| Such limitations on Essex’s ability to act may result in our being precluded from taking action that the Board of Directors believes is in the best interests of Essex’s stockholders |
| As of December 31, 2005, George M Marcus held or controlled more than 50prca of the outstanding units of limited partnership interest in the Operating Partnership, allowing such actions to be blocked the limited partner |
| Essex’s Charter authorizes the issuance of additional shares of common stock or preferred stock and the setting of the preferences, rights and other terms of such preferred stock without the approval of the holders of the common stock |
| We may establish one or more series of preferred stock that could delay, defer or prevent a transaction or a change in control |
| Such a transaction might involve a premium price for our stock or otherwise be in the best interests of the holders of common stock |
| Also, such a class of preferred stock could have dividend, voting or other rights that could adversely affect the interest of holders of common stock |
| Essex’s Charter, as well as Essex’s stockholder rights plan, contains other provisions that may delay, defer or prevent a transaction or a change in control that might be in the best interest of Essex’s stockholders |
| Essex’s stockholder rights plan is designed, among other things, to prevent a person or group from gaining control of us without offering a fair price to all of Essex’s stockholders |
| The Bylaws may be amended by the Board of Directors to include provisions that would have a similar effect, although Essex presently has no such intention |
| The Charter contains ownership provisions limiting the transferability and ownership of shares of capital stock, which may have the effect of delaying, deferring or preventing a transaction or a change in control |
| For example, subject to receiving an exemption from the Board of Directors, potential acquirers may not purchase more than 6prca in value of the stock (other than qualified pension trusts which can acquire 9dtta9prca) |
| This may discourage tender offers that may be attractive to the holders of common stock and limit the opportunity for stockholders to receive a premium for their shares of common stock |
| The Maryland General Corporations Law restricts the voting rights of shares deemed to be “control shares |
| ” 12 _________________________________________________________________ Under the Maryland General Corporations Law, “control shares” are those which, when aggregated with any other shares held by the acquirer, entitle the acquirer to exercise voting power within specified ranges |
| Moreover, any such amendment or elimination of such provision of the Bylaws may result in the application of the control share provisions of the Maryland General Corporations Law not only to control shares which may be acquired in the future, but also to control shares previously acquired |
| If the provisions of the Bylaws are amended or eliminated, the control share provisions of the Maryland General Corporations Law could delay, defer or prevent a transaction or change in control that might involve a premium price for the stock or otherwise be in the best interests of Essex’s stockholders |
| Essex’s joint ventures and joint ownership of properties and partial interests in corporations and limited partnerships could limit Essex’s ability to control such Properties and partial interests - Instead of purchasing properties directly, we have invested and may continue to invest as a co-venturer |
| Joint venturers often have shared control over the operation of the joint venture assets |
| Therefore, it is possible that the co-venturer in an investment might become bankrupt, or have economic or business interests or goals that are inconsistent with our business interests or goals, or be in a position to take action contrary to our instructions or requests, or our policies or objectives |
| Consequently, a co-venturer’s actions might subject property owned by the joint venture to additional risk |
| Although we seek to maintain sufficient influence of any joint venture to achieve its objectives, we may be unable to take action without our joint venture partners’ approval, or joint venture partners could take actions binding on the joint venture without consent |
| Should a joint venture partner become bankrupt, we could become liable for such partner’s share of joint venture liabilities |
| From time to time, we, through the Operating Partnership, invest in corporations, limited partnerships, limited liability companies or other entities that have been formed for the purpose of acquiring, developing or managing real property |
| In certain circumstances, the Operating Partnership’s interest in a particular entity may be less than a majority of the outstanding voting interests of that entity |
| Therefore, the Operating Partnership’s ability to control the daily operations of such an entity may be limited |
| Furthermore, the Operating Partnership may not have the power to remove a majority of the board of directors (in the case of a corporation) or the general partner or partners (in the case of a limited partnership) of such an entity in the event that its operations conflict with the Operating Partnership’s objectives |
| The Operating Partnership may not be able to dispose of its interests in such an entity |
| In the event that such an entity becomes insolvent, the Operating Partnership may lose up to its entire investment in and any advances to the entity |
| We have and in the future may enter into transactions that could require us to pay the tax liabilities of partners, which contribute assets into joint ventures or the Operating Partnership, in the event that certain taxable events, which are within our control, occur |
| Although we plan to hold the contributed assets or defer recognition of gain on their sale pursuant to the like-kind exchange rules under Section 1031 of the Internal Revenue Code, we can provide no assurance that we will be able to do so and if such tax liabilities were incurred they can expect to have a material impact on our financial position |
| Dedicated investment activities and other factors specifically related to Fund II - Fund II involves risks to us such as the following: · our partners in Fund II might remove Essex as the gereral partner of Fund II; · our partners in Fund II might become bankrupt (in which event we might become generally liable for the liabilities of Fund II); · have economic or business interests or goals that are inconsistent with our business interests or goals; · fail to fund capital commitments as contractually required; or · fail to approve decisions regarding Fund II that are in our best interest |
| We will, however, generally seek to maintain sufficient influence over Fund II to permit it to achieve its business objectives |
| Investments in mortgages and other real estate securities - We may invest in securities related to real estate, which could adversely affect our ability to make distributions to stockholders |
| We may purchase securities issued by entities, which own real estate and invest in mortgages or unsecured debt obligations |
| These mortgages may be first, second or third mortgages that may or may not be insured or otherwise guaranteed |
| In general, investments in mortgages include the following risks: · that the value of mortgaged property may be less than the amounts owed, causing realized or unrealized losses; 13 _________________________________________________________________ · the borrower may not pay indebtedness under the mortgage when due, requiring us to foreclose, and the amount recovered in connection with the foreclosure may be less than the amount owed; · that interest rates payable on the mortgages may be lower than our cost of funds; and · in the case of junior mortgages, that foreclosure of a senior mortgage would eliminate the junior mortgage |
| If any of the above were to occur, cash flows from operations and our ability to make expected dividends to stockholders could be adversely affected |
| Possible environmental liabilities - Under various federal, state and local laws, ordinances and regulations, an owner or operator of real estate is liable for the costs of removal or remediation of certain hazardous or toxic substances on, in, to or migrating from such property |
| Such laws often impose liability without regard as to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances |
| The presence of such substances, or the failure to properly remediate such substances, may adversely affect the owner’s or operator’s ability to sell or rent such property or to borrow using such property as collateral |
| Persons exposed to such substances, either through soil vapor or ingestion of the substances may claim personal injury damages |
| Persons who arrange for the disposal or treatment of hazardous or toxic substances or wastes also may be liable for the costs of removal or remediation of such substances at the disposal or treatment facility to which such substances or wastes were sent, whether or not such facility is owned or operated by such person |
| Certain environmental laws impose liability for release of asbestos-containing materials (“ACMs”) into the air, and third parties may seek recovery from owners or operators of real properties for personal injury associated with ACMs |
| In connection with the ownership (direct or indirect), operation, management and development of real properties, the Company could be considered an owner or operator of such properties or as having arranged for the disposal or treatment of hazardous or toxic substances and, therefore, may be potentially liable for removal or remediation costs, as well as certain other costs, including governmental fines and costs related to injuries of persons and property |
| Investments in real property create a potential for environmental liabilities on the part of the owner of such real property |
| We carry certain limited insurance coverage for this type of environmental risk |
| We have conducted environmental studies which revealed the presence of groundwater contamination at certain properties |
| Such contamination at certain of these properties was reported to have migrated on-site from adjacent industrial manufacturing operations |
| The former industrial users of the properties were identified as the source of contamination |
| The environmental studies noted that certain properties are located adjacent to any possible down gradient from sites with known groundwater contamination, the lateral limits of which may extend onto such properties |
| The environmental studies also noted that at certain of these properties, contamination existed because of the presence of underground fuel storage tanks, which have been removed |
| In general, in connection with the ownership, operation, financing, management and development of real properties, we may be potentially liable for removal or clean-up costs, as well as certain other costs and environmental liabilities |
| We may also be subject to governmental fines and costs related to injuries to persons and property |
| Recently there has been an increasing number of lawsuits against owners and managers of multifamily properties alleging personal injury and property damage caused by the presence of mold in residential real estate |
| Some of these lawsuits have resulted in substantial monetary judgments or settlements |
| Essex has been sued for mold related matters and has settled some, but not all, such matters, which matters remain unresolved and pending |
| Insurance carriers have reacted to mold related liability awards by excluding mold related claims from standard policies and pricing mold endorsements at prohibitively high rates |
| Essex has, however, purchased pollution liability insurance, which includes limited coverage for mold, although the insurance may not cover all pending or future mold claims |
| Essex has adopted programs designed to manage the existence of mold in its properties as well as guidelines for promptly addressing and resolving reports of mold to minimize any impact mold might have on residents or the property |
| Essex cannot assure you that it will not be sued in the future for mold related matters not can it assure you that the liabilities resulting from such current or future mold related matters will not be substantial |
| The costs of carrying insurance to address potential mold related claims may also be substantial |
| California has enacted legislation commonly referred to as “Proposition 65” requiring that “clear and reasonable” warnings be given to consumers who are exposed to chemicals known to the State of California to cause cancer or reproductive toxicity, including tobacco smoke |
| Although we have sought to comply with Proposition 65 requirements, we cannot assure you that we will not be adversely affected by litigation relating to Proposition 65 |
| Methane gas is a naturally-occurring gas that is commonly found below the surface in several areas, particularly in the Southern California coastal areas |
| Methane is a non-toxic gas, but can be ignitable in confined spaces |
| Although naturally-occurring, methane gas is not regulated at the state or federal level, some local governments, such as the County of Los Angeles, have imposed requirements that new buildings install detection systems in areas where methane gas is known to be located |
| 14 _________________________________________________________________ Methane gas is also associated with certain industrial activities, such as former municipal waste landfills |
| Essex cannot assure you that it will not be adversely affected by costs related to its compliance with methane gas related requirements or litigation costs related to methane or radon gas |
| Except with respect to three Properties, the Company has no indemnification agreements from third parties for potential environmental clean-up costs at its Properties |
| The Company has no way of determining at this time the magnitude of any potential liability to which it may be subject arising out of unknown environmental conditions or violations with respect to the properties formerly owned by the Company |
| No assurance can be given that existing environmental studies with respect to any of the Properties reveal all environmental liabilities, that any prior owner or operator of a Property did not create any material environmental condition not known to the Company, or that a material environmental condition does not exist as to any one or more of the Properties |
| The Company has limited insurance coverage for the types of environmental liabilities described above |
| General uninsured losses - We have a comprehensive insurance program covering our property and operating activities |
| There are, however, certain types of extraordinary losses for which we may not have insurance |
| Accordingly, we may sustain uninsured losses due to insurance deductibles, self-insured retention, uninsured claims or casualties, or losses in excess of applicable coverage |
| Changes in real estate tax and other laws - Generally we do not directly pass through costs resulting from changes in real estate tax laws to residential property tenants |
| We also do not generally pass through increases in income, service or other taxes, to tenants under leases |
| These costs may adversely affect funds from operations and the ability to make distributions to stockholders |
| Similarly, compliance with changes in (i) laws increasing the potential liability for environmental conditions existing on properties or the restrictions on discharges or other conditions or (ii) rent control or rent stabilization laws or other laws regulating housing may result in significant unanticipated expenditures, which would adversely affect funds from operations and the ability to make distributions to stockholders |
| Changes in financing policy; no limitation on debt - We have adopted a policy of maintaining a debt-to-total-market-capitalization ratio of less than 50prca |
| The calculation of debt-to-total-market-capitalization is as follows: total property indebtedness divided by the sum of total property indebtedness plus total equity market capitalization |
| As used in this calculation, total equity market capitalization is equal to the aggregate market value of the outstanding shares of common stock (based on the greater of current market price or the gross proceeds per share from public offerings of the outstanding shares plus any undistributed net cash flow), assuming the conversion of all limited partnership interests in the Operating Partnership into shares of common stock and the gross proceeds of the preferred units |
| Based on this calculation (including the current market price and excluding undistributed net cash flow), our debt-to-total-market-capitalization ratio was approximately 35prca as of December 31, 2005 |
| Our organizational documents do not limit the amount or percentage of indebtedness that may be incurred |
| Accordingly, the Board of Directors of Essex could change current policies and the policies of the Operating Partnership regarding indebtedness |
| If we changed these policies, we could incur more debt, resulting in an increased risk of default on our obligations and the obligations of the Operating Partnership, and an increase in debt service requirements that could adversely affect our financial condition and results of operations |
| Such increased debt could exceed the underlying value of the Properties |
| We are subject to certain tax risks - Essex has elected to be taxed as a REIT under the Internal Revenue Code |
| Essex’s qualification as a REIT requires it to satisfy numerous requirements (some on an annual and quarterly basis) established under highly technical and complex Internal Revenue Code provisions for which there are only limited judicial or administrative interpretations, and involves the determination of various factual matters and circumstances not entirely within Essex’s control |
| Although Essex intends that its current organization and method of operation enable it to qualify as a REIT, it cannot assure you that it so qualifies or that it will be able to remain so qualified in the future |
| Future legislation, new regulations, administrative interpretations or court decisions (any of which could have retroactive effect) could adversely affect Essex’s ability to qualify as a REIT or adversely affect its stockholders |
| If it fails to qualify as a REIT in any taxable year, Essex would be subject to US federal income tax (including any applicable alternative minimum tax) on its taxable income at corporate rates, and would not be allowed to deduct dividends paid to its shareholders in computing its taxable income |
| Essex may also be disqualified from treatment as a REIT for the four taxable years following the year in which it failed to qualify |
| The additional tax liability would reduce its net earnings available for investment or distribution to stockholders, and it would no longer be required to make distributions to its stockholders |
| Even if Essex continues to qualify as a REIT, it will continue to be subject to certain federal, state and local taxes on its income and property |
| 15 _________________________________________________________________ Essex has established several taxable REIT subsidiaries |
| Despite Essex’s qualification as a REIT, its taxable REIT subsidiaries must pay US federal income tax on their taxable income |
| While Essex will attempt to ensure that its dealings with its taxable REIT subsidiaries will not adversely affect its REIT qualification, it cannot provide assurance that it will successfully achieve that result |
| Furthermore, Essex may be subject to a 100prca penalty tax, or its taxable REIT subsidiaries may be denied deductions, to the extent its dealings with its taxable REIT subsidiaries are not deemed to be arm’s length in nature |
| No assurances can be given that Essex’s dealings with its taxable REIT subsidiaries will be arm’s length in nature |
| From time to time, we may transfer or otherwise dispose of some of our Properties |
| Under the Internal Revenue Code, any gain resulting from transfers of Properties that we hold as inventory or primarily for sale to customers in the ordinary course of business would be treated as income from a prohibited transaction subject to a 100prca penalty tax |
| Since we acquire properties for investment purposes, we do not believe that our occasional transfers or disposals of property are prohibited transactions |
| However, whether property is held for investment purposes is a question of fact that depends on all the facts and circumstances surrounding the particular transaction |
| The Internal Revenue Service may contend that certain transfers or disposals of properties by us are prohibited transactions |
| If the Internal Revenue Service were to argue successfully that a transfer or disposition of property constituted a prohibited transaction, then Essex would be required to pay a 100prca penalty tax on any gain allocable to Essex from the prohibited transaction and Essex’s ability to retain future gains on real property sales may be jeopardized |
| Income from a prohibited transaction might adversely affect Essex’s ability to satisfy the income tests for qualification as a REIT for US federal income tax purposes |
| Therefore, no assurances can be given that Essex will be able to satisfy the income tests for qualification as a REIT |