Investments in Real Estate Entities

Investment in unconsolidated real estate entities

As of June 30, 2014, the Company had investments in seven unconsolidated real estate entities, excluding an interest in the Residual JV (as defined in this Form 10-Q), with ownership interest percentages ranging from 15.2% to 31.3%. The Company accounts for its investments in unconsolidated real estate entities under the equity method of accounting. The significant accounting policies of the Company’s unconsolidated real estate entities are consistent with those of the Company in all material respects.

During the six months ended June 30, 2014, AvalonBay Value Added Fund I, L.P. ("Fund I") sold Weymouth Place, located in Weymouth, MA, South Hills Apartments, located in West Covina, CA, and The Springs, located in Corona, CA. These communities have an aggregate of 616 apartment homes and were sold for $90,750,000. The Company's share of the gain in accordance with GAAP for these dispositions was $2,972,000.

The net assets and results of operations of The Springs were consolidated for financial reporting purposes. As a result, 100% of the gain recognized of $16,656,000 is included in gain on sale of communities in the Condensed Consolidated Statements of Comprehensive Income, and the Company's joint venture partners' 84.8% interest in this gain of $14,132,000 is reported as a component of net (income) loss attributable to noncontrolling interests. Concurrent with the disposition of The Springs, Fund I repaid its obligation to the Company under a fixed rate secured mortgage loan in the amount of $21,748,000 with an interest rate of 6.06% in advance of its October 2014 maturity date. Upon repayment the Company deconsolidated the net assets of The Springs.

During the three months ended June 30, 2014, the Company entered into a joint venture to acquire a land parcel and construct a mixed use building that will contain rental apartments, for-sale residential condominium units and related common elements. The Company will own a 70% interest in the venture and have all of the rights and obligations associated with the rental apartments, and the venture partner will own the remaining 30% interest and have all of the rights and obligations associated with the for-sale condominium units. The Company will also be responsible for the development and construction of the structure. Upon formation of the venture, the Company and its venture partner made capital contributions, with costs incurred subsequent to the initial contributions to be funded through a loan provided by the Company. At June 30, 2014, the Company had provided funding for the venture partner’s share of costs in the amount of $5,284,000 reported as a component of prepaid expenses and other assets on the Condensed Consolidated Balance Sheets. The loan provided to the venture partner will be repaid with the proceeds received from the sale of the residential condominium units. The venture is considered a variable interest entity, and the Company will consolidate its interest in the rental apartments and common areas, and account for the for-sale component of the venture as an unconsolidated investment.

As of June 30, 2014, the Residual JV completed the disposition of substantially all of its indirect interest in German multifamily real estate assets and the associated property management company. The Company’s proportionate share of the gains from dispositions and results of operations for the three and six months ended June 30, 2014 was $6,658,000 and $7,548,000, respectively, recorded as a component of equity in income (loss) of unconsolidated real estate entities in the Condensed Consolidated Statements of Comprehensive Income. The Company received proceeds of $43,112,000 during the six months ended June 30, 2014 from the Residual JV, primarily associated with the dispositions of the venture's interest in German multifamily real estate assets.

The following is a combined summary of the financial position of the entities accounted for using the equity method as of the dates presented, excluding amounts associated with the Residual JV (dollars in thousands):



	6/30/2014		12/31/2013
	(unaudited)		(unaudited)
Assets:
Real estate, net	$	1,854,887	$	1,905,005
Other assets	132,356		164,183

Total assets	$	1,987,243	$	2,069,188

Liabilities and partners’ capital:
Mortgage notes payable and credit facility	$	1,225,047	$	1,251,067
Other liabilities	32,712		32,257
Partners’ capital	729,484		785,864

Total liabilities and partners’ capital	$	1,987,243	$	2,069,188

The following is a combined summary of the operating results of the entities accounted for using the equity method for the periods presented, excluding amounts associated with the Residual JV (dollars in thousands):



	For the three months ended						For the six months ended
	6/30/2014			6/30/2013			6/30/2014			6/30/2013
	(unaudited)						(unaudited)

Rental and other income	$	52,270		$	57,497		$	104,646		$	101,325
Operating and other expenses	(20,483		)	(23,076		)	(41,691		)	(40,816		)
Gain on sale of communities	5,682			11,216			5,682			65,267
Interest expense, net	(13,523		)	(15,829		)	(27,413		)	(31,098		)
Depreciation expense	(13,863		)	(17,783		)	(28,280		)	(30,933		)
Net income	$	10,083		$	12,025		$	12,944		$	63,745

In conjunction with the formation of Fund I and AvalonBay Value Added Fund II, L.P. (“Fund II”), the Company incurred costs in excess of its equity in the underlying net assets of the respective investments. These costs represent $4,929,000 at June 30, 2014 and $5,439,000 at December 31, 2013 of the respective investment balances.

As part of the formation of Fund II, the Company provided a guarantee to one of the limited partners that provides if, upon final liquidation of Fund II, the total amount of all distributions to the guaranteed partner during the life of Fund II (whether from operating cash flow or property sales) does not equal the total capital contributions made by that partner, then the Company will pay the guaranteed partner an amount equal to the shortfall, but in no event more than 10% of the total capital contributions made by the guaranteed partner (maximum of approximately $8,910,000 for Fund II as of June 30, 2014). As of June 30, 2014, the expected realizable value of the real estate assets owned by Fund II is considered adequate to cover the guaranteed distribution amount under a liquidation scenario. The estimated fair value of, and the Company’s obligation under, this guarantee, both at inception and as of June 30, 2014, was not significant and therefore the Company has not recorded any obligation for this guarantee as of June 30, 2014.

Expensed Acquisition, Development and Other Pursuit Costs and Impairment of Long-Lived Assets

The Company capitalizes pre-development costs incurred in pursuit of new development opportunities for which the Company currently believes future development is probable (“Development Rights”). Future development of these Development Rights is dependent upon various factors, including zoning and regulatory approval, rental market conditions, construction costs and the availability of capital. Initial pre-development costs incurred for pursuits for which future development is not yet considered probable are expensed as incurred. In addition, if the status of a Development Right changes, making future development by the Company no longer probable, any capitalized pre-development costs are written off with a charge to expense. The Company expensed costs related to the abandonment of Development Rights as well as costs incurred in pursuing the acquisition of assets or costs incurred pursuing the disposition of assets for which such disposition activity did not occur, in the amounts of $2,017,000 and $195,000 for the three months ended June 30, 2014 and 2013, respectively, and $2,732,000 and $440,000 for the six months ended June 30, 2014 and 2013. Amounts for the three and six months ended June 30, 2013 do not include costs associated with the Archstone Acquisition. For or further discussion of these costs, see Note 5, “Archstone Acquisition.” These costs are included in expensed acquisition, development, and other pursuit costs on the accompanying Condensed Consolidated Statements of Comprehensive Income. These costs can vary greatly, and the costs incurred in any given period may be significantly different in future periods.

The Company evaluates its real estate and other long-lived assets for impairment when potential indicators of impairment exist. Such assets are stated at cost, less accumulated depreciation and amortization, unless the carrying amount of the asset is not recoverable. If events or circumstances indicate that the carrying amount of a long-lived asset may not be recoverable, the Company assesses its recoverability by comparing the carrying amount of the long-lived asset to its estimated undiscounted future cash flows. If the carrying amount exceeds the aggregate undiscounted future cash flows, the Company recognizes an impairment loss to the extent the carrying amount exceeds the estimated fair value of the long-lived asset. Based on periodic tests of recoverability of long-lived assets, the Company did not record any impairment losses for the three and six months ended June 30, 2014 and 2013.

The Company assesses its portfolio of land held for both development and investment for impairment if the intent of the Company changes with respect to either the development of, or the expected holding period for, the land. The Company did not recognize any impairment charges on its investment in land for the three and six months ended June 30, 2014 and 2013.

The Company also evaluates its unconsolidated investments for impairment, considering both the carrying value of the investment, estimated as the expected proceeds that it would receive if the entity were dissolved and the net assets were liquidated at their current GAAP basis, as well as the Company’s proportionate share of any impairment of assets held by unconsolidated investments. There were no impairment losses recognized by any of the Company’s investments in unconsolidated entities during the three and six months ended June 30, 2014 and 2013, respectively.