Investments in Real Estate Entities

Investment in Unconsolidated Real Estate Entities

As of September 30, 2015, the Company had investments in five unconsolidated real estate entities, excluding an interest in the Residual JV (as defined in this Form 10-Q), with ownership interest percentages ranging from 20.0% 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 nine months ended September 30, 2015, AvalonBay Value Added Fund II, L.P. ("Fund II") sold four communities:


•	Eaves Plainsboro, located in Plainsboro, NJ, containing 776 apartment homes was sold for $117,000,000. The Company's share of the gain in accordance with GAAP for the disposition was $9,660,000.


•	Eaves Los Alisos, located in Lake Forest, CA, containing 140 apartment homes was sold for $39,500,000. The Company's share of the gain in accordance with GAAP for the disposition was $4,551,000.


•	Captain Parker Arms, located in Lexington, MA, containing 94 apartment homes was sold for $31,600,000. The Company's share of the gain in accordance with GAAP for the disposition was $3,385,000.


•	Eaves Carlsbad, located in Carlsbad, CA, containing 450 apartment homes was sold for $112,000,000. The Company's share of the gain in accordance with GAAP for the disposition was $12,130,000.

In conjunction with the disposition of these communities during the nine months ended September 30, 2015, Fund II repaid $69,036,000 of related secured indebtedness in advance of the scheduled maturity dates. This resulted in charges for a prepayment penalty and write-off of deferred financing costs, of which the Company's portion was $1,400,000, which was reported as a reduction of equity in income (loss) of unconsolidated real estate entities on the accompanying Condensed Consolidated Statements of Comprehensive Income.

During the nine months ended September 30, 2015, the Company received $20,680,000 from the joint venture partner associated with MVP I, LLC, the entity that owns Avalon at Mission Bay North II, upon agreement with the partner to modify the joint venture agreement to eliminate the Company's promoted interest for future return calculations and associated distributions. Prospectively, earnings and distributions will be based on the Company's 25.0% equity interest in the venture. In addition, MVP I, LLC obtained a $103,000,000, 3.24% fixed rate loan, with a maturity date of July 2025, and used the proceeds and cash on hand to repay its existing $105,000,000, variable rate loan which was scheduled to mature in December 2015, at par.

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):



	9/30/2015		12/31/2014
	(unaudited)		(unaudited)
Assets:
Real estate, net	$	1,390,002	$	1,617,627
Other assets	180,919		72,290
Total assets	$	1,570,921	$	1,689,917

Liabilities and partners’ capital:
Mortgage notes payable and credit facility	$	902,242	$	980,128
Other liabilities	23,891		24,884
Partners’ capital	644,788		684,905
Total liabilities and partners’ capital	$	1,570,921	$	1,689,917

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 nine months ended
	9/30/2015			9/30/2014			9/30/2015			9/30/2014
	(unaudited)						(unaudited)
Rental and other income	$	43,868		$	49,388		$	132,518		$	154,034
Operating and other expenses	(17,910		)	(19,989		)	(52,622		)	(61,680		)
Gain on sale of communities	66,410			327,539			98,899			333,221
Interest expense, net	(14,883		)	(22,922		)	(35,694		)	(50,335		)
Depreciation expense	(11,213		)	(11,934		)	(35,058		)	(40,214		)
Net income	$	66,272		$	322,082		$	108,043		$	335,026

In conjunction with the formation of Fund II, the Company incurred costs in excess of its equity in the underlying net assets of the respective investments. These costs represent $2,591,000 at September 30, 2015 and $3,880,000 at December 31, 2014 of the respective investment balances.

As part of the formation of Fund II, the Company provided to one of the limited partners a guarantee. The guarantee provided that if, upon final liquidation of Fund II, the total amount of all distributions to that partner during the life of Fund II (whether from operating cash flow or property sales) did not equal a minimum of the total capital contributions made by that partner, then the Company would pay the partner an amount equal to the shortfall, but in no event more than 10% of the total capital contributions made by the partner. During the three months ended September 30, 2015, the limited partner transferred its investment interest to an unrelated third party. The guarantee was not transferred with the investment interest, so the Company has no further obligation under the guarantee.

In addition, through subsidiaries, the Company and Equity Residential are members in three limited liability company agreements (collectively, the “Residual JV”). The Company and Equity Residential jointly control the Residual JV and the Company holds a 40.0% economic interest in the assets and liabilities of the Residual JV. During the nine months ended September 30, 2015, the Company recognized equity in income of unconsolidated real estate entities of $11,630,000, associated with the settlement of outstanding legal claims against third parties and disposition activity in the Residual JV.

Investment in Consolidated Real Estate Entities

In conjunction with the development of Avalon Sheepshead Bay, the Company entered into a joint venture agreement to construct a mixed use building that will contain rental apartments, for-sale residential condominium units and related common elements. The Company will own a 70.0% 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 30.0% interest and have all of the rights and obligations associated with the for-sale condominium units. The Company is responsible for the development and construction of the structure, and is providing a loan to the venture partner for the venture partner's share of costs. As of September 30, 2015, the Company has a receivable from the venture partner in the amount of $7,340,000, 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 consolidates its interest in the rental apartments and common areas, and accounts for the for-sale component of the venture as an unconsolidated investment.

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 $3,391,000 and $406,000 for the three months ended September 30, 2015 and 2014, respectively, and $5,251,000 and $3,139,000 for the nine months ended September 30, 2015 and 2014, respectively. These costs are included in expensed acquisition, development, and other pursuit costs, net of recoveries 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 nine months ended September 30, 2015 and 2014, other than related to the impairment on land held for investment and casualty gains and losses from property damage discussed below.

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 during the three months ended September 30, 2015. During the nine months ended September 30, 2015, the Company recognized an impairment charge of $800,000 relating to a parcel of land that was sold during the nine months ended September 30, 2015, to reduce the Company's basis to the contracted sales price less expected costs to sell. This charge is included in casualty and impairment loss (gain), net on the accompanying Condensed Consolidated Statements of Comprehensive Income. The Company did not recognize any impairment charges on its investment in land for the three and nine months ended September 30, 2014.

The Company also evaluates its unconsolidated investments for other than temporary impairment, considering both the extent and amount by which the carrying value of the investment exceeds the fair value, and the Company’s intent and ability to hold the investment to recover its carrying value. The Company also evaluates its proportionate share of any impairment of assets held by unconsolidated investments. Excluding amounts associated with the Residual JV, there was no impairment loss recognized by any of the Company’s investments in unconsolidated entities during the three and nine months ended September 30, 2015 and 2014.

Casualty Gains and Losses

The Company recorded a casualty charge for additional demolition and incident costs related to Edgewater of $658,000 for the three months ended September 30, 2015, and a net casualty gain of $15,663,000 for the nine months ended September 30, 2015, which are included in casualty and impairment loss (gain), net on the accompanying Condensed Consolidated Statements of Comprehensive Income. During the nine months ended September 30, 2015, the Company received $44,142,000 in insurance proceeds, which were partially offset by casualty charges of $21,844,000 to write off the net book value of the building destroyed by the fire at Edgewater, and $6,635,000 to record demolition and additional incident expenses. See discussion in Note 1, "Organization, Basis of Presentation and Significant Accounting Policies, Legal and Other Contingencies," and Part II, Item 1, "Legal Proceedings," for further discussion of the Edgewater fire.

During the nine months ended September 30, 2015, several of the Company's communities in its Northeast markets incurred property and casualty damages from severe winter storms experienced during this time. The Company has recorded an impairment due to a casualty loss of $4,195,000 to recognize the damages from the storms, included in casualty and impairment loss (gain), net on the accompanying Condensed Consolidated Statements of Comprehensive Income.