| MID AMERICA APARTMENT COMMUNITIES INC ITEM 1A RISK FACTORS The Company’s ability to generate sufficient cash flow in order to pay common dividends to its shareholders depends on its ability to generate funds from operations in excess of capital expenditure requirements and preferred dividends, and/or to have access to the markets for debt and equity financing |
| Funds from operations and the value of the Company’s properties may be insufficient because of factors which are beyond the Company’s control |
| Such events or conditions could include: • competition from other apartment communities; • overbuilding of new apartment units or oversupply of available apartment units in the Company’s markets, which might adversely affect apartment occupancy or rental rates and/or require rent concessions in order to lease apartment units; • increases in operating costs (including real estate taxes and insurance premiums) due to inflation and other factors, which may not be offset by increased rents; • the Company’s inability to rent apartments on favorable economic terms; • changes in governmental regulations and the related costs of compliance; • changes in tax laws and housing laws including the enactment of rent control laws or other laws regulating multifamily housing; • changes in interest rate levels and the availability of financing, which could lead renters to purchase homes (if interest rates decrease and home loans are more readily available) or increase the Company’s acquisition and operating costs (if interest rates increase and financing is less readily available); • weakness in the overall economy which lowers job growth and the associated demand for apartment housing; and • the relative illiquidity of real estate investments |
| At times, the Company relies on external funding sources to fully fund the payment of distributions to shareholders and its capital investment program (including its existing property expansion developments) |
| While the Company has sufficient liquidity to permit distributions at current rates through additional borrowings if necessary, any significant and sustained deterioration in operations could result in the Company’s financial resources being insufficient to pay distributions to shareholders at the current rate, in which event the Company would be required to reduce the distribution rate |
| Any decline in the Company’s 7 _________________________________________________________________ funds from operations could adversely affect the Company’s ability to make distributions to its shareholders or to meet its loan covenants and could have a material adverse effect on the Company’s stock price |
| Debt Level, Refinancing and Loan Covenant Risk May Adversely Affect Financial Condition and Operating Results At December 31, 2005, the Company had total debt outstanding of dlra1dtta14 billion |
| Payments of principal and interest on borrowings may leave the Company with insufficient cash resources to operate the Communities or pay distributions that are required to be paid in order for the Company to maintain its qualification as a REIT The Company currently intends to limit its total debt to approximately 60prca of the undepreciated book value of its assets, although the Company’s charter and bylaws do not limit its debt levels |
| Circumstances may cause the Company to exceed that target from time to time |
| As of December 31, 2005, the Company’s ratio of debt to undepreciated book value was approximately 56prca |
| The Company’s Board of Directors can modify this policy at any time which could allow the Company to become more highly leveraged and decrease its ability to make distributions to its shareholders |
| In addition, the Company must repay its debt upon maturity, and the inability to access debt or equity capital at attractive rates could adversely affect the Company’s financial condition and/or its funds from operations |
| The Company relies on Fannie Mae and Freddie Mac (the “Agencies”) for the majority of its debt financing and has agreements with the Agencies and with other lenders that require it to comply with certain covenants |
| The breach of any one of these covenants would place the Company in default with its lenders and may have serious consequences on the operations of the Company |
| Variable Interest Rates May Adversely Affect Funds from Operations At December 31, 2005, effectively dlra173 million of the Company’s debt bore interest at a variable rate and was not hedged by interest rate swaps or caps |
| An additional dlra25 million also bore interest at a variable rate at December 31, 2005, but was hedged by an interest rate swap that became operative in February 2006 |
| The Company may incur additional debt in the future that also bears interest at variable rates |
| Variable rate debt creates higher debt service requirements if market interest rates increase, which would adversely affect the Company’s funds from operations and the amounts available to pay distributions to shareholders |
| The Company’s dlra950 million secured credit facilities with Prudential Mortgage Capital, credit enhanced by Fannie Mae, are predominately floating rate facilities |
| The Company also has a dlra100 million credit facility with Freddie Mac which is a variable rate facility |
| At December 31, 2005, a total of dlra907dtta8 million was outstanding under these facilities |
| These facilities represent the majority of the variable interest rates the Company was exposed to at December 31, 2005 |
| Large portions of the interest rates on these facilities have been hedged by means of a number of interest rate swaps and caps |
| Upon the termination of these swaps and caps, the Company will be exposed to the risks of varying interest rates |
| Issuances of Additional Debt or Equity May Adversely Impact Our Financial Condition Our capital requirements depend on numerous factors, including the occupancy rates of our apartment properties, dividend payment rates to our shareholders, development and capital expenditures, costs of operations and potential acquisitions |
| The Company cannot accurately predict the timing and amount of our capital requirements |
| If our capital requirements vary materially from our plans, the Company may require additional financing sooner than anticipated |
| Accordingly, the Company could become more leveraged, resulting in increased risk of default on our obligations and in an increase in our debt service requirements, both of which could adversely affect our financial condition and ability to access debt and equity capital markets in the future |
| Increasing Real Estate Taxes and Insurance Costs May Negatively Impact Financial Condition Because the Company has substantial real estate holdings, the cost of real estate taxes and insuring its Communities is a significant component of expense |
| Real estate taxes and insurance premiums are subject to significant increases and fluctuations which can be widely outside of the control of the Company |
| If the costs associated with real estate taxes and insurance should rise, the Company’s financial condition could be negatively impacted and the Company’s ability to pay its dividend could be affected |
| 8 _________________________________________________________________ Losses from Catastrophes May Exceed Our Insurance Coverage The Company carries comprehensive liability and property insurance on our properties, which the Company believes is of the type and amount customarily obtained on real property assets |
| The Company intends to obtain similar coverage for properties the Company acquires in the future |
| However, some losses, generally of a catastrophic nature, such as losses from floods, hurricanes or earthquakes, may be subject to limitations |
| The Company exercises its discretion in determining amounts, coverage limits and deductibility provisions of insurance, with a view to maintaining appropriate insurance on our investments at a reasonable cost and on suitable terms |
| If the Company suffers a substantial loss, its insurance coverage may not be sufficient to pay the full current market value or current replacement value of our lost investment |
| Inflation, changes in building codes and ordinances, environmental considerations and other factors also might make it infeasible to use insurance proceeds to replace a property after it has been damaged or destroyed |
| New Acquisitions May Fail to Perform as Expected and Failure to Integrate Acquired Communities and New Personnel Could Create Inefficiencies The Company intends to actively acquire and improve multifamily properties for rental operations |
| The Company may underestimate the costs necessary to bring an acquired property up to standards established for its intended market position |
| Additionally, to grow successfully, the Company must be able to apply our experience in managing our existing portfolio of apartment communities to a larger number of properties |
| The Company must also be able to integrate new management and operations personnel as our organization grows in size and complexity |
| Failures in either area will result in inefficiencies that could adversely affect our overall profitability |
| The Company May Not Be Able To Sell Properties When Appropriate Real estate investments are relatively illiquid and generally cannot be sold quickly |
| The Company may not be able to change our portfolio promptly in response to economic or other conditions |
| This inability to respond promptly to changes in the performance of our investments could adversely affect our financial condition and ability to make distributions to our security holders |
| Failure to Qualify as a REIT Would Cause The Company to be Taxed as a Corporation If the Company fails to qualify as a REIT for federal income tax purposes, the Company will be taxed as a corporation |
| The Internal Revenue Service may challenge our qualification as a REIT for prior years, and new legislation, regulations, administrative interpretations or court decisions may change the tax laws with respect to qualification as a REIT or the federal tax consequences of such qualification |
| For any taxable year that the Company fails to qualify as a REIT, the Company would be subject to federal income tax on our taxable income at corporate rates, plus any applicable alternative minimum tax |
| In addition, unless entitled to relief under applicable statutory provisions, the Company would be disqualified from treatment as a REIT for the four taxable years following the year during which qualification is lost |
| This treatment would reduce our net earnings available for investment or distribution to shareholders because of the additional tax liability for the year or years involved |
| In addition, distributions would no longer qualify for the dividends paid deduction nor be required to be made in order to preserve REIT status |
| The Company might be required to borrow funds or to liquidate some of our investments to pay any applicable tax resulting from our failure to qualify as a REIT Environmental Problems are Possible and can be Costly Federal, state and local laws and regulations relating to the protection of the environment may require a current or previous owner or operator of real estate to investigate and clean up hazardous or toxic substances or petroleum product releases at such property |
| The owner or operator may have to pay a governmental entity or third parties for property damage and for investigation and clean-up costs incurred by such parties in connection with the contamination |
| These laws typically impose clean-up responsibility and liability without regard to whether the owner or operator knew of or caused the presence of the contaminants |
| Even if more than one person may have been responsible for the contamination each person covered by the environmental laws may be held responsible for all of the clean-up costs incurred |
| In addition, third parties may sue the 9 _________________________________________________________________ owner or operator of a site for damages and costs resulting from environmental contamination emanating from that site |
| All of our properties have been the subject of environmental assessments completed by qualified independent environmental consultant companies |
| These environmental assessments have not revealed, nor is the Company aware of, any environmental liability that our management believes would have a material adverse effect on our business, results of operations, financial condition or liquidity |
| Over the past four years, there have 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 |
| The Company cannot be assured that existing environmental assessments of our properties reveal all environmental liabilities, that any prior owner of any of our properties did not create a material environmental condition not known to the Company, or that a material environmental condition does not otherwise exist |
| Compliance or Failure to Comply with Laws Requiring Access to Our Properties by Disabled Persons Could Result in Substantial Cost The Americans with Disabilities Act, the Fair Housing Act of 1988 and other federal, state and local laws generally require that public accommodations be made accessible to disabled persons |
| Noncompliance could result in the imposition of fines by the government or the award of damages to private litigants |
| These laws may also restrict renovations by requiring improved access to such buildings by disabled persons or may require the Company to add other structural features that increase our construction costs |
| Legislation or regulations adopted in the future may impose further burdens or restrictions on the Company with respect to improved access by disabled persons |
| The Company cannot ascertain the costs of compliance with these laws, which may be substantial |
| Our Investments in Joint Ventures May Involve Risks Investments in joint ventures may involve risks which may not otherwise be present in our direct investments such as: • the potential inability of our joint venture partner to perform; • the joint venture partner may have economic or business interests or goals which are inconsistent with or adverse to ours; • the joint venture partner may take actions contrary to our requests or instructions or contrary to our objectives or policies; and • the joint venturers may not be able to agree on matters relating to the property they jointly own |
| Although each joint owner will have a right of first refusal to purchase the other owner’s interest, in the event a sale is desired, the joint owner may not have sufficient resources to exercise such right of first refusal |