10-K 1 a201610-k.htm 10-K Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) 
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
Commission file number 1-12672
AVALONBAY COMMUNITIES, INC.
(Exact name of registrant as specified in its charter)
Maryland
 
77-0404318
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)

Ballston Tower
671 N. Glebe Rd, Suite 800
Arlington, Virginia  22203
(Address of principal executive offices, including zip code)
 
(703) 329-6300
(Registrant’s telephone number, including area code) 
__________________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
(Title of each class)
 
(Name of each exchange on which registered)
Common Stock, par value $.01 per share
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    
Yes  ý    No  o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    
Yes  o    No  ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    
Yes  ý    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    
Yes  ý    No  o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ý
 
Accelerated filer o
 
Non-accelerated filer o
 (Do not check if a
smaller reporting company)
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    
Yes  o    No  ý
The aggregate market value of the registrant's Common Stock, par value $.01 per share, held by nonaffiliates of the registrant, as of June 30, 2016 was $24,703,191,114.
The number of shares of the registrant's Common Stock, par value $.01 per share, outstanding as of January 31, 2017 was 137,330,988.
Documents Incorporated by Reference
Portions of AvalonBay Communities, Inc.'s Proxy Statement for the 2017 annual meeting of stockholders, a definitive copy of which will be filed with the SEC within 120 days after the year end of the year covered by this Form 10-K, are incorporated by reference herein as portions of Part III of this Form 10-K.



TABLE OF CONTENTS
 
 
 
 
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PART I

This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Our actual results could differ materially from those set forth in each forward-looking statement. Certain factors that might cause such a difference are discussed in this report, including in the section entitled “Forward-Looking Statements” included in this Form 10-K. You should also review Item 1A. “Risk Factors” for a discussion of various risks that could adversely affect us.

ITEM 1.    BUSINESS

General

AvalonBay Communities, Inc. (the “Company,” which term, unless the context otherwise requires, refers to AvalonBay Communities, Inc. together with its subsidiaries), is a Maryland corporation that has elected to be treated as a real estate investment trust (“REIT”) for federal income tax purposes. We develop, redevelop, acquire, own and operate multifamily communities primarily in New England, the New York/New Jersey metro area, the Mid-Atlantic, the Pacific Northwest, and Northern and Southern California. We focus on leading metropolitan areas in these regions that we believe are characterized by growing employment in high wage sectors of the economy, lower housing affordability and a diverse and vibrant quality of life. We believe these market characteristics offer the opportunity for superior risk-adjusted returns on apartment community investments relative to other markets that do not have these characteristics.

At January 31, 2017, we owned or held a direct or indirect ownership interest in:

259 operating apartment communities containing 75,038 apartment homes in 10 states and the District of Columbia, of which 244 communities containing 70,864 apartment homes were consolidated for financial reporting purposes, five communities containing 1,539 apartment homes were held by joint ventures in which we hold an ownership interest, and 10 communities containing 2,635 apartment homes were owned by the Funds (as defined below). Four of the consolidated communities containing 1,671 apartment homes were under redevelopment, as discussed below;

27 communities under development, one of which is being developed through a joint venture, that are expected to contain an aggregate of 8,629 apartment homes when completed; and

rights to develop an additional 25 communities that, if developed in the manner expected, will contain an estimated 8,487 apartment homes.

We generally obtain ownership in an apartment community by developing a new community on either vacant land or land with improvements that we raze, or by acquiring an existing community. In selecting sites for development or acquisition, we favor locations that are near expanding employment centers and convenient to transportation, recreation areas, entertainment, shopping and dining.

Our consolidated real estate investments consist of the following reportable segments: Established Communities, Other Stabilized Communities and Development/Redevelopment Communities.

Established Communities are generally operating communities that were owned and had stabilized occupancy and operating expenses as of the beginning of the prior year such that year-over-year comparisons are meaningful. Other Stabilized Communities are generally all other operating communities that have stabilized occupancy and operating expenses during the current year, but that were not owned or had not achieved stabilization as of the beginning of the prior year such that year-over-year comparisons are not meaningful, as well as communities that are planned for disposition during the current year. Development/Redevelopment Communities consist of communities that are under construction, communities where substantial redevelopment is in progress or is planned to begin during the current year and communities under lease-up. A more detailed description of these segments and other related information can be found in Note 8, “Segment Reporting,” of the Consolidated Financial Statements set forth in Item 8 of this report.


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Our principal financial goal is to increase long-term shareholder value through the development, redevelopment, acquisition, operation and, when appropriate, disposition of apartment communities in our markets. To help meet this goal, we regularly (i) monitor our investment allocation by geographic market and product type, (ii) develop, redevelop and acquire interests in apartment communities in our selected markets, (iii) selectively sell apartment communities that no longer meet our long-term strategy or when opportunities are presented to realize a portion of the value created through our investment and redeploy the proceeds from those sales and (iv) endeavor to maintain a capital structure that is aligned with our business risks with a view to maintaining continuous access to cost-effective capital. We pursue our development, investment and operating activities with the purpose of Creating a Better Way to Live. Our strategic vision is to be the leading apartment company in select US markets, providing a range of distinctive living experiences that customers value. We pursue this vision by targeting what we believe are among the best markets and submarkets, leveraging our strategic capabilities in market research and consumer insight and being disciplined in our capital allocation and balance sheet management. In addition to our in-house development and construction capabilities, we supplement our growth through our in-house redevelopment and acquisition platforms. We believe that our organizational structure, which includes dedicated development and operational teams in each of our regions, and strong culture are key differentiators and provide us with access to highly talented, dedicated and capable associates.

We operate our apartment communities under three core brands Avalon, AVA and Eaves by Avalon. We believe that this branding differentiation allows us to target our product offerings to multiple customer groups and submarkets within our existing geographic footprint. The Avalon brand is our core offering, focusing on upscale apartment living and high end amenities and services in urban and suburban markets. Our AVA brand is designed for people who want to live in or near urban neighborhoods and in close proximity to public transportation, services, shopping and night-life. AVA apartments are generally smaller, many engineered for roommate living and feature modern design and a technology focus. Our Eaves by Avalon brand is designed for renters who seek good quality apartment living, often in a suburban setting, with practical amenities and services at a more modest price point.

During the three years ended December 31, 2016, we acquired six apartment communities and disposed of 16 apartment communities, excluding activity for the Funds (as defined below). During the three years ended December 31, 2016, we completed the development of 38 apartment communities and the redevelopment of 19 apartment communities.

On February 27, 2013, pursuant to an asset purchase agreement dated November 26, 2012, the Company, together with Equity Residential, acquired, directly or indirectly, all of the assets owned by Archstone Enterprise LP (“Archstone,” which has since changed its name to Jupiter Enterprise LP), including all of the ownership interests in joint ventures and other entities owned by Archstone, and assumed Archstone’s liabilities, both known and unknown, with certain limited exceptions. Under the terms of the purchase agreement, the Company acquired approximately 40.0% of Archstone's assets and liabilities and Equity Residential acquired approximately 60.0% of Archstone’s assets and liabilities (the “Archstone Acquisition”).

In March 2005, we formed AvalonBay Value Added Fund, L.P. (“Fund I”), a private, discretionary real estate investment vehicle, which we managed and in which we owned a 15.2% interest. Fund I acquired communities with the objective of either redeveloping or repositioning them, or taking advantage of market cycle timing and improved operating performance. From its inception in March 2005 through the close of its investment period in 2008, Fund I acquired 20 communities. During the three years ended December 31, 2016, we realized our pro rata share of the gain from the sale of the last of the four communities owned by Fund I. Fund I disposed of the last of its communities in 2014, and was dissolved in April 2015.

In September 2008, we formed AvalonBay Value Added Fund II, L.P. (“Fund II”), a second institutional discretionary real estate investment fund which we manage and in which we own a 31.3% interest. In 2012, Fund II acquired its final operating community. From the commencement of Fund II through the close of its investment period, Fund II acquired 13 operating communities. As of December 31, 2016, Fund II owns three communities containing 1,366 apartment homes. During the three years ended December 31, 2016, we realized our pro rata share of the gain from the sale of nine communities owned by Fund II.

Archstone Multifamily Partners AC LP (the “U.S. Fund”) was formed in July 2011 and is fully invested. As of December 31, 2016, the U.S. Fund owns seven communities containing 1,269 apartment homes, one of which includes a marina containing 229 boat slips. In conjunction with the Archstone Acquisition, through subsidiaries, we acquired and own the general partner of the U.S. Fund and hold a 28.6% interest in the U.S. Fund. During the three years ended December 31, 2016, we realized our pro rata share of the gain from the sale of two communities owned by the U.S. Fund.


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Archstone Multifamily Partners AC JV LP (the “AC JV”) is a joint venture in which we acquired Archstone's 20.0% ownership interest. The AC JV was formed in 2011 and as of December 31, 2016, owns three operating apartment communities containing 921 apartment homes, one of which completed development in 2014. The AC JV partnership agreement contains provisions that require us to provide a right of first offer (“ROFO”) to the AC JV in connection with additional opportunities to acquire or develop additional interests in multifamily real estate assets within a specified geographic radius of the existing assets, generally one mile or less. The ROFO restriction expires in 2019.

A more detailed description of Fund I, Fund II, and the U.S. Fund (collectively, the “Funds”), the AC JV and other joint ventures and the related investment activity can be found in the discussion in Note 5, “Investments in Real Estate Entities,” of the Consolidated Financial Statements in Item 8 of this report and in Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations.”

Through subsidiaries, the Company and Equity Residential entered into three limited liability company agreements (collectively, the “Residual JV”) through which the Company and Equity Residential acquired (i) certain assets of Archstone that the Company and Equity Residential have substantially divested (the “Residual Assets”), and (ii) various liabilities of Archstone that the Company and Equity Residential agreed to assume in conjunction with the Archstone Acquisition (the “Residual Liabilities”). The Residual Assets included a 20.0% interest in Lake Mendota Investments, LLC and Subsidiaries (“SWIB”), a joint venture which disposed of the last of its communities in 2015, various licenses, insurance policies, contracts, office leases and other miscellaneous assets. The Residual Liabilities include most existing or future litigation and claims related to Archstone’s operations for periods before the close of the Archstone Acquisition, except for (i) claims that principally relate to the physical condition of the assets acquired directly by the Company or Equity Residential, which generally remain the sole responsibility of the Company or Equity Residential, as applicable, and (ii) certain tax and other litigation between Archstone and various equity holders in Archstone related to periods before the close of the Archstone Acquisition, and claims which may arise due to changes in the capital structure of Archstone that occurred prior to closing, for which the seller has agreed to indemnify the Company and Equity Residential. The Company and Equity Residential jointly control the Residual JV and the Company holds a 40.0% economic interest in the Residual JV.

During 2016, we sold 12 operating communities including sales by unconsolidated entities and recognized a gain in accordance with U.S. generally accepted accounting principles (“GAAP”) of $428,370,000. In addition, we sold other real estate primarily composed of ancillary real estate and recognized a gain in accordance with GAAP of $10,224,000.

A further discussion of our development, redevelopment, disposition, acquisition, property management and related strategies follows.

Development Strategy.    We select land for development and follow established procedures that we believe minimize both the cost and the risks of development. As one of the largest developers of multifamily rental apartment communities in our selected markets, we identify development opportunities through local market presence and access to local market information achieved through our regional offices. In addition to our principal executive office in Arlington, Virginia, we also maintain regional offices, administrative offices or specialty offices, including offices that are in or near the following cities:

Bellevue, Washington;
Boston, Massachusetts;
Fairfield, Connecticut;
Irvine, California;
Iselin, New Jersey;
Long Island, New York;
Los Angeles, California;
New York, New York;
San Diego, California;
San Francisco, California;
San Jose, California; and
Virginia Beach, Virginia.


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After selecting a target site, we usually negotiate for the right to acquire the site either through an option or a long-term conditional contract. Options and long-term conditional contracts generally allow us to acquire the target site shortly before the start of construction, which reduces development-related risks and preserves capital. However, as a result of competitive market conditions for land suitable for development, we have sometimes acquired and held land prior to construction for extended periods while entitlements are obtained, or acquired land zoned for uses other than residential with the potential for rezoning. For further discussion of our Development Rights, refer to Item 2. “Communities” in this report.

We generally act as our own general contractor and construction manager, except for certain mid-rise and high-rise apartment communities, where we may elect to use third-party general contractors as construction managers. We generally perform these functions directly (although we may use a wholly-owned subsidiary) both for ourselves and for the joint ventures and partnerships of which we are a member or a partner. We believe direct involvement in construction enables us to achieve higher construction quality, greater control over construction schedules and cost savings. Our development, property management and construction teams monitor construction progress to ensure quality workmanship and a smooth and timely transition into the leasing and operating phase.

During periods where competition for development land is more intense, we may acquire improved land with existing commercial uses and rezone the site for multifamily residential use. During the period that we hold these buildings for future development, any rent received in excess of expenses from these operations, which we consider to be incidental, is accounted for as a reduction in our investment in the development pursuit and not as net income. Any expenses relating to these operations, in excess of any rents received, are accounted for as a reduction in net income. We have also participated, and may in the future participate, in master planned or other large multi-use developments where we commit to build infrastructure (such as roads) to be used by other participants or commit to act as construction manager or general contractor in building structures or spaces for third parties (such as unimproved ground floor retail space, municipal garages or parks). Costs we incur in connection with these activities may be accounted for as additional invested capital in the community or we may earn fee income for providing these services. Particularly with large scale, urban in-fill developments, we may engage in significant environmental remediation efforts to prepare a site for construction.

Throughout this report, the term “development” is used to refer to the entire property development cycle, including pursuit of zoning approvals, procurement of architectural and engineering designs and the construction process. References to “construction” refer to the actual construction of the property, which is only one element of the development cycle.

Redevelopment Strategy.    When we undertake the redevelopment of a community, our goal is to renovate and/or rebuild an existing community so that our total investment is generally below replacement cost and the community is well positioned in the market to achieve attractive returns on our capital. We have dedicated redevelopment teams and procedures that are intended to control both the cost and risks of redevelopment. Our redevelopment teams, which include redevelopment, construction and property management personnel, monitor redevelopment progress. We believe we achieve significant cost savings by undertaking the redevelopment primarily through an occupied turn strategy, in which we continue to operate the community as we install improvements, working to minimize any impact on our current residents.

Throughout this report, the term “redevelopment” is used to refer to the entire redevelopment cycle, including planning and procurement of architectural and engineering designs, budgeting and actual renovation work. The actual renovation work is referred to as “reconstruction,” which is only one element of the redevelopment cycle.

Disposition Strategy.    We sell assets that no longer meet our long-term strategy or when market conditions are favorable, and we redeploy the proceeds from those sales to develop, redevelop and acquire communities and to rebalance our portfolio across or within geographic regions. This also allows us to realize a portion of the value created through our investments and provides additional liquidity. We are then able to redeploy the net proceeds from our dispositions in lieu of raising that amount of capital externally. When we decide to sell a community, we generally solicit competing bids from unrelated parties for these individual assets and consider the sales price of each proposal.


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As part of the Archstone Acquisition, we acquired, and still own, 14 assets that had previously been contributed by third parties on a tax-deferred basis to an Archstone partnership in which the third parties received ownership interests. To protect the tax-deferred nature of the contribution, the third parties are entitled to cash payments if we trigger tax obligations to the third parties by selling, or failing to maintain sufficient levels of secured financing on, the contributed assets. Our tax protection payment obligations with respect to these assets expire at different times and in some cases don’t expire until the death of a third party who contributed ownership interests to the Archstone partnership. After review and investigation of Archstone’s tax and accounting records, we estimate that, had we sold or taken other triggering actions in 2016 with respect to all 14 assets, the aggregate amount of the tax protection payments that would have been triggered would have been approximately $54,600,000. At the present time, we do not intend to take actions that would cause us to be required to make tax protection payments with respect to any of these assets.

Acquisition Strategy.    Our core competencies in development and redevelopment discussed above allow us to be selective in the acquisitions we target. Acquisitions allow us to achieve rapid penetration into markets in which we desire an increased presence. Acquisitions (and dispositions) also help us achieve our desired product mix or rebalance our portfolio. Portfolio growth also allows for fixed general and administrative costs to be a smaller percentage of overall community Net Operating Income (“NOI”).
While we have achieved growth in the past through the establishment of discretionary real estate investments funds, which placed certain limitations on our ability to acquire new communities during their investments periods, we are not presently pursuing the formation of a new discretionary real estate investment fund, preferring at this time to maintain flexibility in shaping our portfolio of wholly-owned assets through acquisitions and dispositions.

Property Management Strategy.    We seek to increase operating income through innovative, proactive property management that will result in higher revenue from communities while constraining operating expenses. Our principal strategies to maximize revenue include:

focusing on resident satisfaction;
staggering lease terms such that lease expirations are better matched to traffic patterns;
balancing high occupancy with premium pricing and increasing rents as market conditions permit; and
employing revenue management software to optimize the pricing and term of leases.

Constraining growth in operating expenses is another way in which we seek to increase earnings growth. Growth in our portfolio and the resulting increase in revenue allows for fixed operating costs to be spread over a larger volume of revenue, thereby increasing operating margins. We constrain growth in operating expenses in a variety of ways, which include, but are not limited to, the following:

we use purchase order controls, acquiring goods and services from pre-approved vendors;
we use national negotiated contracts and also purchase supplies in bulk where possible;
we bid third-party contracts on a volume basis;
we strive to retain residents through high levels of service in order to eliminate the cost of preparing an apartment home for a new resident and to reduce marketing and vacant apartment utility costs;
we perform turnover work in-house or hire third parties, generally considering the most cost effective approach as well as expertise needed to perform the work;
we undertake preventive maintenance regularly to maximize resident safety and satisfaction, as well as to maximize property and equipment life;
we have established a customer care center, centralizing and improving the efficiency and consistency in the application of Company policies for many of the administrative tasks associated with owning and operating apartment communities; and
we aggressively pursue real estate tax appeals.

On-site property management teams receive bonuses based largely upon the revenue, expense, NOI and customer service metrics produced at their respective communities. We use and continuously seek ways to improve technology applications to help manage our communities, believing that the accurate collection of financial and resident data will enable us to maximize revenue and control costs through careful leasing decisions, maintenance decisions and financial management.

We generally manage the operation and leasing activity of our communities directly (although we may use a wholly-owned subsidiary) both for ourselves and the joint ventures and partnerships of which we are a member or a partner. From time to time we may engage a third party to manage leasing and/or maintenance activity at one or more of our communities.


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From time to time we also pursue or arrange ancillary services for our residents to provide additional revenue sources or increase resident satisfaction. As a REIT, we generally cannot provide direct services to our residents that are not customarily provided by a landlord, nor can we directly share in the income of a third party that provides such services. However, we can provide such non-customary services to residents or share in the revenue or income from such services if we do so through a “taxable REIT subsidiary,” which is a subsidiary that is treated as a “C corporation” subject to federal income taxes. See “Tax Matters” below.

Financing Strategy.    We maintain a capital structure that provides financial flexibility to ensure we can select cost effective capital market options that are well matched to our business risks. We estimate that our short-term liquidity needs will be met from cash on hand, borrowings under our $1,500,000,000 revolving variable rate unsecured credit facility (the “Credit Facility”), sales of current operating communities and/or issuance of additional debt or equity securities. A determination to engage in an equity or debt offering depends on a variety of factors such as general market and economic conditions, our short and long-term liquidity needs, the relative costs of debt and equity capital and growth opportunities. A summary of debt and equity activity for the last three years is reflected on our Consolidated Statement of Cash Flows of the Consolidated Financial Statements set forth in Item 8 of this report.

We have entered into, and may continue in the future to enter into, joint ventures (including limited liability companies or partnerships) through which we would own an indirect economic interest of less than 100% of the community or communities owned directly by such joint ventures. Our decision to either hold an apartment community in fee simple or to have an indirect interest in the community through a joint venture is based on a variety of factors and considerations, including: (i) the economic and tax terms required by a seller of land or of a community; (ii) our desire to diversify our portfolio of communities by market, submarket and product type; (iii) our desire at times to preserve our capital resources to maintain liquidity or balance sheet strength; and (iv) our projection, in some circumstances, that we will achieve higher returns on our invested capital or reduce our risk if a joint venture vehicle is used. Investments in joint ventures are not limited to a specified percentage of our assets. Each joint venture agreement is individually negotiated, and our ability to operate and/or dispose of a community in our sole discretion may be limited to varying degrees depending on the terms of the joint venture agreement.

In addition, from time to time, we may offer shares of our equity securities, debt securities or options to purchase stock in exchange for property. We may also acquire properties in exchange for properties we currently own.

Other Strategies and Activities.    While we emphasize equity real estate investments in rental apartment communities, we have the ability to invest in other types of real estate, mortgages (including participating or convertible mortgages), securities of other REITs or real estate operating companies, or securities of technology companies that relate to our real estate operations or of companies that provide services to us or our residents, in each case consistent with our qualification as a REIT. In addition, we own and lease retail space at our communities when either (i) the highest and best use of the space is for retail (e.g., street level in an urban area); (ii) we believe the retail space will enhance the attractiveness of the community to residents or; (iii) some component of retail space is required to obtain entitlements to build apartment homes. As of December 31, 2016, we had a total of 693,410 square feet of rentable retail space, excluding retail space within communities currently under development. Gross rental revenue provided by leased retail space in 2016 was $21,390,000 (1.0% of total revenue). We may also develop a property in conjunction with another real estate company that will own and operate the retail or for-sale residential components of a mixed-use building or project that we help develop. If we secure a development right and believe that its best use, in whole or in part, is to develop the real estate with the intent to sell rather than hold the asset, we may, through a taxable REIT subsidiary, develop real estate for sale. Any investment in securities of other entities, and any development of real estate for sale, is subject to the percentage of ownership limitations, gross income tests, and other limitations that must be observed for REIT qualification.

We have not engaged in trading, underwriting or agency distribution or sale of securities of other issuers and do not intend to do so. At all times we intend to make investments in a manner so as to qualify as a REIT unless, because of circumstances or changes to the Internal Revenue Code of 1986, as amended (the “Code”) (or the Treasury Regulations thereunder), our Board of Directors determines that it is no longer in our best interest to qualify as a REIT.

Tax Matters

We filed an election with our 1994 federal income tax return to be taxed as a REIT under the Code and intend to maintain our qualification as a REIT in the future. As a qualified REIT, with limited exceptions, such as those described under “Property Management Strategy” above, we will not be taxed under federal and certain state income tax laws at the corporate level on our taxable net income to the extent taxable net income is distributed to our stockholders. We expect to make sufficient distributions to avoid income tax at the corporate level. While we believe that we are organized and qualified as a REIT and we intend to operate in a manner that will allow us to continue to qualify as a REIT, there can be no assurance that we will be successful in this regard. Qualification as a REIT involves the application of highly technical and complex provisions of the Code for which there are limited

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judicial and administrative interpretations and involves the determination of a variety of factual matters and circumstances not entirely within our control.

Competition

We face competition from other real estate investors, including insurance companies, pension and investment funds, partnerships and investment companies and other REITs, to acquire and develop apartment communities and acquire land for future development. As an owner and operator of apartment communities, we also face competition for prospective residents from other operators whose communities may be perceived to offer a better location or better amenities or whose rent may be perceived as a better value given the quality, location and amenities that the resident seeks. We also compete against condominiums and single-family homes that are for sale or rent. Although we often compete against large, sophisticated developers and operators for development opportunities and for prospective residents, real estate developers and operators of any size can provide effective competition for both real estate assets and potential residents.

Environmental and Related Matters

As a current or prior owner, operator and developer of real estate, we are subject to various federal, state and local environmental laws, regulations and ordinances and also could be liable to third parties resulting from environmental contamination or noncompliance at our communities. For some development communities we undertake extensive environmental remediation to prepare the site for construction, which could be a significant portion of our total construction cost. Environmental remediation efforts could expose us to possible liabilities for accidents or improper handling of contaminated materials during construction. These and other risks related to environmental matters are described in more detail in Item 1A. “Risk Factors.”

We believe that more government regulation of energy use, along with a greater focus on environmental protection, may, over time, have a significant impact on urban growth patterns. If changes in zoning to encourage greater density and proximity to mass transit do occur, such changes could benefit multifamily housing and those companies with a competency in high-density development. However, there can be no assurance as to whether or when such changes in regulations or zoning will occur or, if they do occur, whether the multifamily industry or the Company will benefit from such changes.

Other Information

We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any document we file at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may call the SEC at 1-202-551-8090 for further information on the operation of the Public Reference Room. Our SEC filings are also available to the public from the SEC's website at www.sec.gov.

We maintain a website at www.avalonbay.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to the Securities Exchange Act of 1934 are available free of charge in the “Investor Relations” section of our website as soon as reasonably practicable after the reports are filed with or furnished to the SEC. In addition, the charters of our Board's Nominating and Corporate Governance Committee, Audit Committee and Compensation Committee, as well as our Director Independence Standards, Corporate Governance Guidelines, Code of Business Conduct and Ethics, Policy Regarding Shareholder Rights Agreements, Policy Regarding Shareholder Approval of Future Severance Agreements, Executive Stock Ownership Guidelines, Policy on Political Contributions and Government Relations, and Policy on Recoupment, are available free of charge in that section of our website or by writing to AvalonBay Communities, Inc., Ballston Tower, Suite 800, 671 N. Glebe Rd., Arlington, Virginia 22203, Attention: Chief Financial Officer. To the extent required by the rules of the SEC and the NYSE, we will disclose amendments and waivers relating to these documents in the same place on our website.

We were incorporated under the laws of the State of California in 1978. In 1995, we reincorporated in the State of Maryland and have been focused on the ownership and operation of apartment communities since that time. As of January 31, 2017, we had 3,071 employees.


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ITEM 1A.    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 in this Form 10-K.

Development, redevelopment, construction and operating risks could affect our profitability.

We intend to continue to develop and redevelop apartment home communities. These activities can include long planning and entitlement timelines and can involve complex and costly activities, including significant environmental remediation or construction work in high-density urban areas. These activities may be exposed to the following risks:

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;
occupancy rates and rents at a community may fail to meet our original 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 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 incur costs that exceed our original estimates due to increased material, labor or other costs;
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, the Fair Housing Act or other federal, state or local requirements. 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 estimate 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 may increase, particularly for labor and certain materials and, for some of our Development Communities and Development Rights (as defined below), the total construction costs may be higher than the original budget. Total capitalized cost includes all capitalized costs incurred and projected to be incurred to develop or redevelop a community, determined in accordance with GAAP, including:

land and/or property acquisition costs;
fees paid to secure air rights and/or tax abatements;
construction or reconstruction costs;
costs of environmental remediation;
real estate taxes;
capitalized interest and insurance;
loan fees;
permits;
professional fees;
allocated development or redevelopment overhead; and
other regulatory fees.

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.


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The construction and maintenance of our communities includes a risk of major casualty events that could materially damage our property and the property of others and pose the risk of personal injury. While we carry insurance for such risks in amounts we deem reasonable, we cannot assure that such insurance will be adequate, and when we have incurred and in the future may incur such casualties we are subject to losses on account of deductibles and self-insured amounts in any event. Such casualties may also expose us in the future to higher insurance premiums, greater construction or operating costs (either voluntarily assumed by us or as a result of new local regulations), and risks to our reputation among prospective residents or municipalities from which we may seek approvals in the future, all of which could have a material adverse effect on our business and our financial condition and results of operations.

Unfavorable changes in market and economic conditions could adversely affect occupancy, rental rates, operating expenses, and the overall market value of our assets, including joint ventures and investments in the Funds.

Local conditions in our markets significantly affect occupancy, rental rates and the operating performance of our communities. The risks that may adversely affect conditions in those markets include the following:

corporate restructurings and/or layoffs, 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;
rent control or rent stabilization laws, or other laws regulating housing, that could prevent us from raising rents to offset increases in operating costs; and
economic conditions that could cause an increase in our operating expenses, such as increases in property taxes, utilities, compensation of on-site associates and routine maintenance.

Changes in applicable laws, or noncompliance with applicable laws, could adversely affect our operations or expose us to liability.

We must develop, construct and operate our communities in compliance with numerous federal, state and local laws and regulations, some of which may conflict with one another or be subject to limited judicial or regulatory interpretations. These laws and regulations may include zoning laws, building codes, landlord tenant laws and other laws generally applicable to business operations. Noncompliance with laws could expose us to liability.

Lower revenue growth or significant unanticipated expenditures may result from our need to comply with changes in (i) laws imposing remediation requirements and 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 other residential landlord/tenant laws, or (iii) other governmental rules and regulations or enforcement policies affecting the development, use and operation of our communities, including changes to building codes and fire and life-safety codes.

We have seen a recent increase in municipalities considering or being urged by advocacy groups to consider rent control or rent stabilization laws and regulations or take other actions which could limit our ability to raise rents based solely on market conditions. Depending on the nature of such laws or regulations and the number of our communities that become subject to any such restriction on rent increases, our revenues and net income could be adversely affected. For example, in 2016 in Mountain View, California, the voters passed a referendum that would limit rent increases on existing tenants (but not on new move-ins) in communities built before 1995. We have three communities with a total of 946 apartment homes that would be subject to the new law, although the implementation of the Mountain View ordinance is currently stayed in connection with a lawsuit challenging the ordinance filed by the California Apartment Association.

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.

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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 for new investments.

Capital and credit market conditions may adversely affect our access to various sources of capital and/or the cost of capital, which could impact our business activities, dividends, earnings, and common stock price, among other things.

In periods when the capital and credit markets experience significant volatility, the amounts, sources and cost of capital available to us may be adversely affected. We primarily use external financing to fund construction and to refinance indebtedness as it matures. If sufficient sources of external financing are not available to us on cost effective terms, we could be forced to limit our development and redevelopment activity and/or take other actions to fund our business activities and repayment of debt, such as selling assets, reducing our cash dividend or paying out less than 100% of our taxable income. To the extent that we are able and/or choose to access capital at a higher cost than we have experienced in recent years (reflected in higher interest rates for debt financing or a lower stock price for equity financing) our earnings per share and cash flows could be adversely affected. In addition, the price of our common stock may fluctuate significantly and/or decline in a high interest rate or volatile economic environment. We believe that the lenders under our Credit Facility will fulfill their lending obligations thereunder, but if economic conditions deteriorate, there can be no assurance that the ability of those lenders to fulfill their obligations would not be adversely impacted.

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 in order for us to continue to qualify as a REIT, we are required to annually distribute dividends generally equal to at least 90% of our REIT taxable income, computed without regard to the dividends paid deduction and excluding any net capital gain. 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 these outcomes 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, contractual variable interest rate debt. In addition, we regularly seek access to both fixed and variable rate debt financing to repay maturing debt and to finance our development and redevelopment activity. 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 mortgages on our 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 (e.g., 50% or 80% of area median income), or who meet other qualifying tests. As of December 31, 2016, approximately 5.8% of our apartment homes at current operating communities were under income 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 and, in consequence, can also adversely affect 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 if we do not redeem the bonds.

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Risks related to indebtedness.

We have a Credit Facility with a syndicate of commercial banks. 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 that are subject to secured debt, our Credit Facility and the indenture under which a substantial portion of our debt was issued contain customary restrictions, requirements and other 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. Refer to Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations” for further discussion.

The mortgages on those of our properties subject to secured debt generally include provisions which stipulate a prepayment penalty or payment that we will be obligated to pay in the event that we elect to repay the mortgage note prior to the earlier of (i) the stated maturity of the note, or (ii) the date at which the mortgage note is prepayable without such penalty or payment. If we elect to repay some or all of the outstanding principal balance for our mortgage notes, we may incur prepayment penalties or payments under these provisions which could adversely affect our results of operations.

Failure to maintain our current credit ratings could adversely affect our cost of funds, related margins, liquidity and access to capital markets.

There are two major debt rating agencies that routinely evaluate and rate our debt. Their ratings are based on a number of factors, which include their assessment of our financial strength, liquidity, capital structure, asset quality, amount of real estate under development, and sustainability of cash flow and earnings, among other factors. If market conditions change, we may not be able to maintain our current credit ratings, which could adversely affect our cost of funds and related margins, liquidity and access to capital markets.

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.

Failure to generate sufficient revenue or other liquidity needs could limit cash flow available for distributions to stockholders.

A decrease in rental revenue, or liquidity needs such as the repayment of indebtedness or funding of our development activities, could have an adverse effect on our ability to pay distributions to our stockholders. 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.

The form, timing and/or amount of dividend distributions in future periods may vary and be impacted by economic and other considerations.

The form, timing and/or amount of dividend distributions will be declared at the discretion of the Board of Directors and will depend on actual cash from operations, our financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Code and other factors as the Board of Directors may consider relevant. The Board of Directors may modify our dividend policy from time to time.


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We may choose to pay dividends in our own stock, in which case stockholders may be required to pay tax in excess of the cash they receive.

We may distribute taxable dividends that are payable in part in our stock, as we did in the fourth quarter of 2008. Taxable stockholders receiving such dividends will be required to include the full amount of the dividend as income to the extent of our current and accumulated earnings and profits for federal income tax purposes. As a result, a U.S. stockholder may be required to pay tax with respect to such dividends in excess of the cash received. If a U.S. stockholder sells the stock it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, with respect to non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock. In addition, the trading price of our stock would experience downward pressure if a significant number of our stockholders sell shares of our stock in order to pay taxes owed on dividends.

Difficulty of selling apartment communities could limit liquidity and financial 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 difficult to sell quickly at prices we find acceptable. 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.

Our business strategy includes acquiring as well as developing communities. 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 with new brands and community formats, 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. 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. We may be exposed to a variety of risks if we choose to enter new markets, including an inability to accurately evaluate 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.

Although we are primarily in the multifamily business, we also own and lease ancillary retail space when a retail component represents the best use of the space, as is often the case with large urban in-fill developments. We also may engage or have an interest in for-sale activity. We may be unsuccessful in owning and leasing retail space at our communities or in developing real estate with the intent to sell, which could have an adverse effect on our results of operations.

Land we hold with no current intent to develop may be subject to future impairment charges.

We own parcels of land that we do not currently intend to develop. As discussed in Item 2. “Communities—Other Land and Real Estate Assets,” in the event that the fair market value of a parcel changes such that we determine that the carrying basis of the parcel reflected in our financial statements is greater than the parcel's then current fair value, less costs to dispose, we would be subject to an impairment charge, which would reduce our net income.


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We are exposed to various risks from our 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. Joint venture investments (including investments through partnerships or limited liability companies) 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 that 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 that 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.

We are exposed to risks associated with investment in and management of discretionary real estate investment funds and joint ventures.

We formed Fund II, in which we have an equity interest of 31.3%, and as part of the Archstone Acquisition we acquired equity interests in the U.S. Fund and the AC JV of 28.6% and 20.0%, respectively, which, through wholly-owned subsidiaries, we manage as the general partner and managing member. The investment periods for Fund II and the U.S. Fund are over. The Funds and joint ventures (collectively, the "ventures") present risks, including the following:

our subsidiaries that are the general partners of the ventures are generally liable, under partnership law, for the debts and obligations of the respective ventures, subject to certain exculpation and indemnification rights pursuant to the terms of the partnership agreement of the ventures;
investors in the ventures holding a majority of the partnership interests may remove us as the general partner without cause, in the case of Fund II, subject to our right to receive compensation for an additional period of management fees after such removal and our right to acquire one of the properties then held by such ventures;
while we have broad discretion to manage the ventures, 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 ventures to implement certain decisions that we consider beneficial; and
we may be liable and/or our status as a REIT may be jeopardized if either the ventures, or the REIT entities associated with the ventures, fail to comply with various tax or other regulatory matters.

The governance provisions of our joint ventures with Equity Residential could adversely affect our flexibility in dealing with such joint venture assets and liabilities.

In connection with the Archstone Acquisition, we created joint ventures with Equity Residential that manage or have an interest in certain of the acquired assets and liabilities. These structures involve participation in the ventures by Equity Residential whose interests and rights may not be the same as ours. Joint ownership of an investment in real estate involves risks not associated with direct ownership of real estate, including the risk that Equity Residential may at any time have economic or other business interests or goals which become inconsistent with our business interests or goals, including inconsistent goals relating to the sale of properties held in the joint ventures or the timing of the termination and liquidation of the joint ventures. Under the form for the joint venture arrangements, neither we nor Equity Residential expect to individually have the sole power to control the ventures, and an impasse could occur, which could adversely affect the applicable joint venture and decrease potential returns to us and our investors.

We rely on information technology in our operations, and any breach, interruption or security failure of that technology could have a negative impact on our business, results of operations, financial condition and/or reputation.

Information security risks have generally increased in recent years due to the rise in new technologies and the increased sophistication and activities of perpetrators of cyber attacks.

We collect and hold personally identifiable information of our residents and prospective residents in connection with our leasing and property management activities, and we collect and hold personally identifiable information of our associates in connection with their employment. In addition, we engage third party service providers that may have access to such personally identifiable information in connection with providing necessary information technology and security and other business services to us.

We address potential breaches or disclosure of this confidential personally identifiable information by implementing a variety of security measures intended to protect the confidentiality and security of this information including (among others) engaging reputable, recognized firms to help us design and maintain our information technology and data security systems, including testing and verification of their proper and secure operations on a periodic basis. We also maintain cyber risk insurance to provide some coverage for certain risks arising out of data and network breaches.


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However, there can be no assurance that we will be able to prevent unauthorized access to this information. Any failure in or breach of our operational or information security systems, or those of our third party service providers, as a result of cyber attacks or information security breaches could result in a wide range of potentially serious harm to our business operations and financial prospects, including (among others) disruption of our business and operations, disclosure or misuse of confidential or proprietary information (including personal information of our residents and/or associates), damage to our reputation, and/or potentially significant legal and/or financial liabilities and penalties.

We are exposed to risks that are either uninsurable, not economically insurable or in excess of our insurance coverage, including risks discussed below.

Earthquake risk. As further described in Item 2. “Communities—Insurance and Risk of Uninsured Losses,” many of our West Coast communities are located in the general vicinity of active earthquake faults. We cannot assure you that an earthquake would not cause damage or losses greater than insured levels. In the event of a loss in excess of insured limits, we could lose our capital invested in the affected community, as well as anticipated future revenue from that community. We would also continue to be obligated to repay any mortgage indebtedness or other obligations related to the community. Any such loss could materially and adversely affect our business and our financial condition and results of operations.

Insurance coverage for earthquakes can be costly and in limited supply. As a result, we may experience shortages in desired coverage levels if market conditions are such that insurance is not available or the cost of insurance makes it, in management's view, economically impractical.

Severe or inclement weather risk. Particularly in New England and the Metro New York/New Jersey area, we are exposed to risks associated with inclement or severe weather, including hurricanes, severe winter storms and coastal flooding. Severe or inclement weather may result in increased costs, such as losses and costs resulting from repair of water and wind damage, removal of snow and ice, and, in the case of our development communities, delays in construction that result in increased construction costs and delays in realizing rental revenues from a community. In addition, severe or inclement weather could increase the need for maintenance of our communities.

Where we have a geographic concentration of exposures, a single catastrophe that affects a region, such as an earthquake that affects the West Coast or a hurricane or severe winter storm that affects the Mid-Atlantic, Metro New York/New Jersey or New England regions, may have a significant negative effect on our financial condition and results of operations.

Climate change risk. To the extent that significant changes in the climate occur in areas where our communities are located, we may experience extreme weather and changes in precipitation and temperature, all of which may result in physical damage to or a decrease in demand for properties located in these areas or affected by these conditions. Should the impact of climate change be material in nature, including significant property damage to or destruction of our communities, or occur for lengthy periods of time, our financial condition or results of operations may be adversely affected. In addition, changes in federal, state and local legislation and regulation based on concerns about climate change could result in increased capital expenditures on our existing properties and our new development properties (for example, to improve their energy efficiency and/or resistance to inclement weather) without a corresponding increase in revenue, resulting in adverse impacts to our net income.

Terrorism risk. We have significant investments in large metropolitan markets, such as the Metro New York/New Jersey and Washington, D.C. markets, that have in the past been or may in the future be the target of actual or threatened terrorist attacks. Future terrorist attacks in these markets could directly or indirectly damage our communities, both physically and financially, or cause losses that exceed our insurance coverage and that could have a material adverse effect on our business, financial condition and results of operations.

A significant uninsured property or liability loss could have a material adverse effect on our financial condition and results of operations.

In addition to the earthquake insurance discussed above, we carry commercial general liability insurance, property insurance and terrorism insurance with respect to our communities on terms and in amounts we consider commercially reasonable. There are, however, certain types of losses (such as losses arising from acts of war) that are not insured, in full or in part, because they are either uninsurable or the cost of insurance makes it, in management's view, economically impractical. If an uninsured property loss or a property loss in excess of insured limits were to occur, we could lose our capital invested in a community, as well as the anticipated future revenues from such community. We would also continue to be obligated to repay any mortgage indebtedness or other obligations related to the community. If an uninsured liability to a third party were to occur, we would incur the cost of defense and settlement with, or court ordered damages to, that third party. A significant uninsured property or liability loss could materially and adversely affect our business and our financial condition and results of operations.

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We may incur costs due to environmental contamination or non-compliance.

Under various federal, state and local environmental and public health laws, regulations and ordinances, we may be required, regardless of knowledge or responsibility, to investigate and remediate the effects of hazardous or toxic substances or petroleum product releases at our properties (including in some cases natural substances such as methane and radon gas) and may be held liable under these laws or common law to a governmental entity or to third parties for property, personal injury or natural resources damages and for investigation and remediation costs incurred as a result of the contamination. These damages and costs may be substantial and may exceed any insurance coverage we have for such events. The presence of these substances, or the failure to properly remediate the contamination, may adversely affect our ability to borrow against, develop, sell or rent the affected property. In addition, some environmental laws create or allow a government agency to impose a lien on the contaminated site in favor of the government for damages and costs it incurs as a result of the contamination.

The development, construction and operation of our communities are subject to regulations and permitting under various federal, state and local laws, regulations and ordinances, which regulate matters including wetlands protection, storm water runoff and wastewater discharge. These laws and regulations may impose restrictions on the manner in which our communities may be developed, and noncompliance with these laws and regulations may subject us to fines and penalties.

Certain federal, state and local laws, regulations and ordinances govern the removal, encapsulation or disturbance of asbestos containing materials (“ACMs”) when such materials are in poor condition or in the event of renovation or demolition of a building. These laws and the common law may impose liability for release of ACMs and may allow third parties to seek recovery from owners or operators of real properties for personal injury associated with exposure to ACMs. We are not aware that any ACMs were used in the construction of the communities we developed. ACMs were, however, used in the construction of a number of the communities that we have acquired. We implement an operations and maintenance program at each of the communities at which ACMs are detected.

We are aware that some of our communities have lead paint and have implemented an operations and maintenance program at each of those communities.
 
Environmental agencies and third parties may assert claims for remediation or personal injury based on the alleged actual or potential intrusion into buildings of chemical vapors from soils or groundwater underlying or in the vicinity of those buildings or on nearby properties.

All of our stabilized operating communities, and all of the communities that we are currently developing, have been subjected to at least a Phase I or similar environmental assessment, which generally does not involve invasive techniques such as soil or groundwater sampling. These assessments, together with subsurface assessments conducted on some properties, have not revealed, and we are not otherwise aware of, any environmental conditions that we believe would have a material adverse effect on our business, assets, financial condition or results of operations. In connection with our ownership, operation and development of communities, from time to time we undertake substantial remedial action in response to the presence of subsurface or other contaminants, including contaminants in soil, groundwater and soil vapor beneath or affecting our buildings. In some cases, an indemnity exists upon which we may be able to rely if environmental liability arises from the contamination or remediation costs exceed estimates. There can be no assurance, however, that all necessary remediation actions have been or will be undertaken at our properties or that we will be indemnified, in full or at all, in the event that environmental liability arises.

Mold growth may occur when excessive moisture accumulates in buildings or on building materials, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Although the occurrence of mold at multifamily and other structures, and the need to remediate such mold, is not a new phenomenon, there has been increased awareness in recent years that certain molds may in some instances lead to adverse health effects, including allergic or other reactions. To help limit mold growth, we educate residents about the importance of adequate ventilation and request or require that they notify us when they see mold or excessive moisture. We have established procedures for promptly addressing and remediating mold or excessive moisture from apartment homes when we become aware of its presence regardless of whether we or the resident believe a health risk is presented. However, we cannot provide assurance that mold or excessive moisture will be detected and remediated in a timely manner. If a significant mold problem arises at one of our communities, we could be required to undertake a costly remediation program to contain or remove the mold from the affected community and could be exposed to other liabilities that may exceed any applicable insurance coverage.


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Additionally, we have occasionally been involved in developing, managing, leasing and operating various properties for third parties. Consequently, we may be considered to have been an operator of such properties and, therefore, potentially liable for removal or remediation costs or other potential costs which relate to the release or presence of hazardous or toxic substances or petroleum products at such properties.

We cannot assure you that:

the environmental assessments described above have identified all potential environmental liabilities;
no prior owner created any material environmental condition not known to us or the consultants who prepared the assessments;
no environmental liabilities have developed since the environmental assessments were prepared;
the condition of land or operations in the vicinity of our communities, such as the presence of underground storage tanks, will not affect the environmental condition of our communities;
future uses or conditions, including, without limitation, changes in applicable environmental laws and regulations, will not result in the imposition of environmental liability; and
no environmental liabilities will arise at communities that we have sold for which we may have liability.

Our success depends on key personnel whose continued service is not guaranteed.

Our success depends in part on our ability to attract and retain the services of executive officers and other personnel. Our executive officers make important capital allocation decisions or recommendations to our Board of Directors from among the opportunities identified by our regional offices. There is substantial competition for qualified personnel in the real estate industry, and the loss of several of our key personnel could adversely affect the Company.

Failure to qualify as a REIT would cause us to be taxed as a corporation, which would significantly reduce funds available for distribution to stockholders.

If we fail to qualify as a REIT for federal income tax purposes, we will be subject to federal income tax on our taxable income at regular corporate rates (subject to any applicable alternative minimum tax). In addition, unless we are entitled to relief under applicable statutory provisions, we would be ineligible to make an election for treatment as a REIT for the four taxable years following the year in which we lose our qualification. The additional tax liability resulting from the failure to qualify as a REIT would significantly reduce or eliminate the amount of funds available for distribution to our stockholders. Furthermore, we would no longer be required to make distributions to our stockholders. Thus, our failure to qualify as a REIT could also impair our ability to expand our business and raise capital, and would adversely affect the value of our common stock.

We believe that we are organized and qualified as a REIT, and we intend to operate in a manner that will allow us to continue to qualify as a REIT. However, we cannot assure you that we are qualified as a REIT, or that we will remain qualified in the future. This is because qualification as a REIT involves the application of highly technical and complex provisions of the Code for which there are only limited judicial and administrative interpretations and involves the determination of a variety of factual matters and circumstances not entirely within our control. Our qualification as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution, shareholder ownership and other requirements on a continuing basis. In addition, future legislation, new regulations, administrative interpretations or court decisions may significantly change the tax laws or the application of the tax laws with respect to qualification as a REIT for federal income tax purposes or the federal income tax consequences of this qualification.

Even if we qualify as a REIT, we will be subject to certain federal, state and local taxes on our income and property and on taxable income that we do not distribute to our shareholders. In addition, we may through our taxable REIT subsidiaries hold certain assets and engage in certain activities that a REIT could not engage in directly. We also use taxable REIT subsidiaries to hold certain assets that we believe would be subject to the 100% prohibited transaction tax if sold at a gain outside of a taxable REIT subsidiary. Our taxable REIT subsidiaries are subject to U.S. tax as regular corporations. The Archstone Acquisition increased the amount of assets held through our taxable REIT subsidiaries.


16


Legislative or regulatory action related to federal income tax laws could adversely affect our stockholders and/or our business.

In recent years, numerous legislative, judicial and administrative changes have been made to the federal income tax laws applicable to investments in REITs and similar entities. Additional changes to tax laws are likely to continue to occur in the future, and we cannot assure our stockholders that any such changes will not adversely affect the taxation of a stockholder. In addition, according to publicly released statements, a top legislative priority of the Trump administration and the current Congress may be significant reform of the Code, including significant changes to taxation of business entities and the deductibility of interest expense. There is a substantial lack of clarity around the likelihood, timing and details of any such tax reform and the impact of any potential tax reform on our business and on the price of our common stock. We cannot assure you that changes to tax laws and regulations will not have an adverse effect on an investment in our common stock.

The ability of our stockholders to control our policies and effect a change of control of our company is limited by certain provisions of our charter and bylaws and by Maryland law.

There are provisions in our charter and bylaws that may discourage a third party from making a proposal to acquire us, even if some of our stockholders might consider the proposal to be in their best interests. These provisions include the following:

Our charter authorizes our Board of Directors to issue up to 50,000,000 shares of preferred stock without stockholder approval and to establish the preferences and rights, including voting rights, of any series of preferred stock issued. The Board of Directors may issue preferred stock without stockholder approval, which could allow the Board to issue one or more classes or series of preferred stock that could discourage or delay a tender offer or a change in control.

To maintain our qualification as a REIT for federal income tax purposes, not more than 50% in value of our outstanding stock may be owned, directly or indirectly, by or for five or fewer individuals at any time during the last half of any taxable year. To maintain this qualification, and/or to address other concerns about concentrations of ownership of our stock, our charter generally prohibits ownership (directly, indirectly by virtue of the attribution provisions of the Code, or beneficially as defined in Section 13 of the Securities Exchange Act) by any single stockholder of more than 9.8% of the issued and outstanding shares of any class or series of our stock. In general, under our charter, pension plans and mutual funds may directly and beneficially own up to 15% of the outstanding shares of any class or series of stock. Under our charter, our Board of Directors may in its sole discretion waive or modify the ownership limit for one or more persons, but is not required to do so even if such waiver would not affect our qualification as a REIT. These ownership limits may prevent or delay a change in control and, as a result, could adversely affect our stockholders' ability to realize a premium for their shares of common stock.

As a Maryland corporation, we are subject to the provisions of the Maryland General Corporation Law. Maryland law imposes restrictions on some business combinations and requires compliance with statutory procedures before some mergers and acquisitions may occur, which may delay or prevent offers to acquire us or increase the difficulty of completing any offers, even if they are in our stockholders' best interests. In addition, other provisions of the Maryland General Corporation Law permit the Board of Directors to make elections and to take actions without stockholder approval (such as classifying our Board such that the entire Board is not up for re-election annually) that, if made or taken, could have the effect of discouraging or delaying a change in control.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

None.


17



ITEM 2.    COMMUNITIES

Our real estate investments consist primarily of current operating apartment communities, communities in various stages of development (“Development Communities”) and Development Rights (as defined below). Our current operating communities are further distinguished as Established Communities, Other Stabilized Communities, Lease-Up Communities, Redevelopment Communities and Unconsolidated Communities. While we generally establish the classification of communities on an annual basis, we intend to update the classification of communities during the calendar year to the extent that our plans with regard to the disposition or redevelopment of a community change during the year. The following is a description of each category:

Current Communities are categorized as Established, Other Stabilized, Lease-Up, Redevelopment or Unconsolidated according to the following attributes:

Established Communities (also known as Same Store Communities) are consolidated communities where a comparison of operating results from the prior year to the current year is meaningful, as these communities were owned and had stabilized occupancy as of the beginning of the respective prior year. The Established Communities for the year ended December 31, 2016 are communities that are consolidated for financial reporting purposes, had stabilized occupancy as of January 1, 2015, are not conducting or planning to conduct substantial redevelopment activities, and are not held for sale or planned for disposition within the current year. A community is considered to have stabilized occupancy at the earlier of (i) attainment of 95% physical occupancy or (ii) the one-year anniversary of completion of development or redevelopment.

Other Stabilized Communities are all other completed consolidated communities that have stabilized occupancy, as defined above. Other Stabilized Communities do not include communities that are conducting or planning to conduct substantial redevelopment activities within the current year.

Lease-Up Communities are consolidated communities where construction has been complete for less than one year and where physical occupancy has not reached 95%.

Redevelopment Communities are consolidated communities where substantial redevelopment is in progress or is planned to begin during the current year. Redevelopment is considered substantial when capital invested during the reconstruction effort is expected to exceed the lesser of $5,000,000 or 10% of the community's pre-redevelopment basis and is expected to have a material impact on the operations of the community, including occupancy levels and future rental rates.

Unconsolidated Communities are communities that we have an indirect ownership interest in through our investment interest in an unconsolidated joint venture.

Development Communities are communities that are under construction and for which a certificate or certificates of occupancy for the entire community have not been received. These communities may be partially complete and operating.

Development Rights are development opportunities in the early phase of the development process where we either have an option to acquire land or enter into a leasehold interest, where we are the buyer under a long-term conditional contract to purchase land, where we control the land through a ground lease or own land to develop a new community, or where we are the designated developer in a public-private partnership. We capitalize related pre-development costs incurred in pursuit of new developments for which we currently believe future development is probable.

We currently lease our corporate headquarters located in Arlington, Virginia, as well as our other regional and administrative offices under operating leases.


18


As of December 31, 2016, communities that we owned or held a direct or indirect interest in were classified as follows:

 
Number of
communities
 
Number of
apartment homes
Current Communities
 

 
 

 
 
 
 
Established Communities:
 

 
 

New England
40

 
9,009

Metro NY/NJ
35

 
11,084

Mid-Atlantic
27

 
9,575

Pacific Northwest
13

 
3,221

Northern California
33

 
9,987

Southern California
43

 
12,032

Total Established
191

 
54,908

 
 
 
 
Other Stabilized Communities:
 

 
 

New England
4

 
1,032

Metro NY/NJ
8

 
2,024

Mid-Atlantic
5

 
1,607

Pacific Northwest
1

 
367

Northern California
5

 
1,455

Southern California
10

 
3,419

Non-Core
3

 
1,014

Total Other Stabilized
36

 
10,918

 
 
 
 
Lease-Up Communities
12

 
2,867

 
 
 
 
Redevelopment Communities
4

 
1,671

 
 
 
 
Unconsolidated Communities
15

 
4,174

 
 
 
 
Total Current Communities
258

 
74,538

 
 
 
 
Development Communities (1)
27

 
9,129

 
 
 
 
Total Communities
285

 
83,667

 
 
 
 
Development Rights
25

 
8,487

_________________________________
(1)
Development Communities includes AVA North Point, expected to contain 265 apartment homes, which is being developed within a joint venture.

Our holdings under each of the above categories are discussed on the following pages.


19


We generally establish the composition of our Established Communities portfolio annually. Determined as of January 1 of each of the respective years, the Established Communities portfolios for the years ended December 31, 2016, 2015 and 2014 were as follows:
 
Number of
communities
Established Communities as of December 31, 2013
115

   Communities added
67

   Communities removed (1):
 
        Redevelopment Communities
(8
)
        Disposed Communities
(2
)
Established Communities as of December 31, 2014
172

   Communities added
13

   Communities removed (1):
 
        Redevelopment Communities
(4
)
        Disposed Communities
(3
)
        Other Stabilized (2)
(1
)
Established Communities as of December 31, 2015
177

   Communities added
25

   Communities removed (1):
 
        Redevelopment Communities
(3
)
        Disposed Communities
(6
)
        Communities with multiple phases combined
(2
)
Established Communities as of December 31, 2016
191

_________________________________
(1)
We remove a community from our Established Communities portfolio for the upcoming year (and then generally maintain that designation) if we believe that planned activity for a community for the upcoming year will result in that community's expected operations not being comparable to the prior year period. We believe that a community's expected operations will not be comparable to the prior year period when we intend either (i) to undertake a significant capital renovation of the community, such that we would consider the community to be classified as a Redevelopment Community; or (ii) to dispose of a community through a sale or other disposition transaction.
(2)
Avalon at Edgewater was moved from the Established Communities portfolio to the Other Stabilized portfolio as a result of the fire that occurred in January 2015.

Current Communities

Our Current Communities include garden-style apartment communities consisting of multi-story buildings in landscaped settings, as well as mid and high rise apartment communities in urban settings. As of January 31, 2017, our Current Communities consisted of the following:
 
Number of
communities
 
Number of
apartment homes
   Garden-style (1)
135

 
41,147

   Mid-rise
100

 
26,968

   High-rise
24

 
6,923

Total Current Communities
259

 
75,038

_________________________________
(1)
Includes 16 communities with 5,186 apartment homes that include town homes.

Our communities generally offer a variety of quality amenities and features, which may include:

fully-equipped kitchens;
lofts and vaulted ceilings;
walk-in closets;
patios/decks; and
modern appliances.


20


Other features at various communities may include:

swimming pools;
fitness centers;
tennis courts; and
wi-fi lounges.

As described in Item 1. “Business,” we operate under three core brands Avalon, AVA and Eaves by Avalon. Our core “Avalon” brand focuses on upscale apartment living and high end amenities and services. “AVA” targets customers in high energy, transit-served urban neighborhoods and generally feature smaller apartments, many of which are designed for roommate living with an emphasis on modern design and a technology focus. “Eaves by Avalon” is targeted to the cost conscious, “value” segment in suburban areas. We believe that these brands allow us to further penetrate our existing markets by targeting our market by consumer preference and attitude as well as by location and price.

We also have an extensive and ongoing maintenance program to continually maintain and enhance our communities and apartment homes. The aesthetic appeal of our communities and a service-oriented property management team, focused on the specific needs of residents, enhances market appeal to discriminating residents. We believe our mission of Creating a Better Way To Live helps us achieve higher rental rates and occupancy levels while minimizing resident turnover and operating expenses.

Our Current Communities are located in the following geographic markets:

 
Number of
communities at
 
Number of
apartment homes at
 
Percentage of total
apartment homes at
 
1/31/2016
 
1/31/2017
 
1/31/2016
 
1/31/2017
 
1/31/2016
 
1/31/2017
New England
53

 
50

 
12,528

 
11,783

 
16.6
%
 
15.7
%
Boston, MA
39

 
37

 
9,639

 
9,234

 
12.8
%
 
12.3
%
Fairfield-New Haven, CT
14

 
13

 
2,889

 
2,549

 
3.8
%
 
3.4
%
 
 
 
 
 
 
 
 
 
 
 
 
Metro NY/NJ
49

 
49

 
14,843

 
14,604

 
19.7
%
 
19.4
%
New York City, NY
12

 
12

 
4,292

 
4,583

 
5.7
%
 
6.1
%
New York Suburban
17

 
17

 
4,949

 
4,513

 
6.6
%
 
6.0
%
New Jersey
20

 
20

 
5,602

 
5,508

 
7.4
%
 
7.3
%
 
 
 
 
 
 
 
 
 
 
 
 
Mid-Atlantic
36

 
39

 
13,308

 
14,374

 
17.6
%
 
19.2
%
Washington Metro/Baltimore, MD
36

 
39

 
13,308

 
14,374

 
17.6
%
 
19.2
%
 
 
 
 
 
 
 
 
 
 
 
 
Pacific Northwest
17

 
17

 
4,225

 
4,092

 
5.6
%
 
5.5
%
Seattle, WA
17

 
17

 
4,225

 
4,092

 
5.6
%
 
5.5
%
 
 
 
 
 
 
 
 
 
 
 
 
Northern California
41

 
42

 
12,158

 
12,410

 
16.0
%
 
16.5
%
San Jose, CA
14

 
13

 
5,158

 
4,905

 
6.8
%
 
6.5
%
Oakland-East Bay, CA
11

 
13

 
3,338

 
3,843

 
4.4
%
 
5.1
%
San Francisco, CA
16

 
16

 
3,662

 
3,662

 
4.8
%
 
4.9
%
 
 
 
 
 
 
 
 
 
 
 
 
Southern California
58

 
59

 
17,473

 
16,761

 
23.2
%
 
22.3
%
Los Angeles, CA
36

 
38

 
10,855

 
11,291

 
14.5
%
 
15.0
%
Orange County, CA
12

 
12

 
3,715

 
3,243

 
4.9
%
 
4.3
%
San Diego, CA
10

 
9

 
2,903

 
2,227

 
3.8
%
 
3.0
%
 
 
 
 
 
 
 
 
 
 
 
 
Non-Core
3

 
3

 
1,014

 
1,014

 
1.3
%
 
1.4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
257

 
259

 
75,549

 
75,038

 
100.0
%
 
100.0
%


21


We manage and operate substantially all of our Current Communities. During the year ended December 31, 2016, we completed construction of 1,715 apartment homes in eight communities and sold twelve operating communities containing an aggregate of 4,026 apartment homes. The average age of our Current Communities, on a weighted average basis according to number of apartment homes, is 19.3 years. When adjusted to reflect redevelopment activity, as if redevelopment were a new construction completion date, the weighted average age of our Current Communities is 12.5 years.

Of the Current Communities, as of January 31, 2017, we owned (directly or through wholly-owned subsidiaries):

242 operating communities, including 226 with a full fee simple, or absolute, ownership interest and 16 that are on land subject to a land lease, four of which are dual-branded communities with each pair of dual-branded communities being governed by a single land lease. The leases expire in October 2026, November 2028, May 2041, July 2046, December 2061, September 2065, November 2067, December 2086, April 2095, May 2105, September 2105, April 2106, November 2106 and March 2142;

a general partnership interest and an indirect limited partnership interest in Fund II, the U.S. Fund and the AC JV. Subsidiaries of Fund II own a fee simple interest in three operating communities, subsidiaries of the U.S. Fund own a fee simple interest in seven operating communities, of which one is subject to a land lease, and subsidiaries of the AC JV own a fee simple interest in three operating communities;

a general partnership interest in one partnership structured as a “DownREIT,” as described more fully below, that owns one community; and

a membership interest in three limited liability companies, that each hold a fee simple interest in an operating community.

For some communities, a land lease is used to support tax advantaged structures that ultimately allow us to purchase the land upon lease expiration. We have options to purchase the underlying land for certain of the land leases for which we have an absolute ownership interest that expire in October 2026, November 2028, May 2041, July 2046, December 2086 and April 2095.

We also hold, directly or through wholly-owned subsidiaries, the full fee simple ownership interest in 25 of the 27 Development Communities. One Development Community is being developed within a joint venture and one Development Community is being developed with a private development partner and we will own the multifamily rental portion of the development.

In our partnership structured as a DownREIT, one of our wholly-owned subsidiaries is the general partner, and there are limited partners whose interest in the partnership is represented by units of limited partnership interest. Limited partners are entitled to receive an initial distribution before any distribution is made to the general partner. Under the partnership agreement for the DownREIT, the distributions per unit paid to the holders of units of limited partnership interests are equal to our current common stock dividend amount. The holders of units of limited partnership interest have the right to present all or some of their units for redemption for a cash amount as determined by the partnership agreement and based on the fair value of our common stock. In lieu of a cash redemption by the partnership, we may elect to acquire any unit presented for redemption for one share of our common stock or for such cash amount. As of January 31, 2017, there were 7,500 DownREIT partnership units outstanding. The DownREIT partnership is consolidated for financial reporting purposes.

Development Communities

As of December 31, 2016, we owned or held a direct or indirect interest in 27 Development Communities under construction. We expect these Development Communities, when completed, to add a total of 9,129 apartment homes to our portfolio for a total capitalized cost, including land acquisition costs, of approximately $4,045,000,000. We cannot assure you that we will meet our schedule for construction completion or that we will meet our budgeted costs, either individually, or in the aggregate. You should carefully review Item 1A. “Risk Factors” for a discussion of the risks associated with development activity and our discussion under Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations” (including the factors identified under “Forward-Looking Statements”) for further discussion of development activity.

The following table presents a summary of the Development Communities. We hold a fee simple ownership interest in these communities (directly or through a wholly-owned subsidiary) unless otherwise noted in the table.


22


 
Number of
apartment
homes
 
Projected total
capitalized cost (1)
($ millions)
 
Construction
start
 
Initial actual/ projected occupancy (2)
 
Estimated
completion
 
Estimated
stabilization (3)
1.
 
Avalon Willoughby Square/AVA DoBro Brooklyn, NY
826

 
$
456.3

 
Q3 2013
 
Q4 2015
 
Q1 2017
 
Q3 2017
2.
 
Avalon Huntington Beach (4)
Huntington Beach, CA
378

 
120.3

 
Q2 2014
 
Q1 2016
 
Q1 2017
 
Q3 2017
3.
 
Avalon West Hollywood (4)
West Hollywood, CA
294

 
153.6

 
Q2 2014
 
Q1 2017
 
Q4 2017
 
Q2 2018
4.
 
Avalon North Station
Boston, MA
503

 
271.2

 
Q3 2014
 
Q4 2016
 
Q1 2018
 
Q3 2018
5.
 
Avalon Esterra Park (4)
Redmond, WA
482

 
137.8

 
Q3 2014
 
Q1 2016
 
Q2 2017
 
Q4 2017
6.
 
Avalon Princeton
Princeton, NJ
280

 
95.5

 
Q4 2014
 
Q3 2016
 
Q3 2017
 
Q1 2018
7.
 
Avalon Hunt Valley
Hunt Valley, MD
332

 
74.0

 
Q1 2015
 
Q3 2016
 
Q3 2017
 
Q1 2018
8.
 
AVA NoMa
Washington, D.C.
438

 
148.3

 
Q2 2015
 
Q2 2017
 
Q1 2018
 
Q3 2018
9.
 
Avalon Quincy
Quincy, MA
395

 
95.3

 
Q2 2015
 
Q2 2016
 
Q3 2017
 
Q1 2018
10.
 
Avalon Great Neck
Great Neck, NY
191

 
78.9

 
Q2 2015
 
Q2 2017
 
Q3 2017
 
Q1 2018
11.
 
Avalon Laurel
Laurel, MD
344

 
72.4

 
Q2 2015
 
Q2 2016
 
Q2 2017
 
Q4 2017
12.
 
Avalon Sheepshead Bay (5)
Brooklyn, NY
180

 
86.4

 
Q3 2015
 
Q3 2017
 
Q4 2017
 
Q2 2018
13.
 
Avalon Newcastle Commons I (4)
Newcastle, WA
378

 
116.3

 
Q3 2015
 
Q4 2016
 
Q4 2017
 
Q2 2018
14.
 
Avalon Chino Hills
Chino Hills, CA
331

 
96.6

 
Q3 2015
 
Q4 2016
 
Q4 2017
 
Q1 2018
15.
 
Avalon Maplewood (6)
Maplewood, NJ
235

 
65.4

 
Q4 2015
 
Q2 2017
 
Q4 2017
 
Q2 2018
16.
 
Avalon Rockville Centre II
Rockville Centre, NY
165

 
57.8

 
Q4 2015
 
Q3 2017
 
Q4 2017
 
Q2 2018
17
 
AVA Wheaton
Wheaton, MD
319

 
75.6

 
Q4 2015
 
Q3 2017
 
Q2 2018
 
Q4 2018
18.
 
Avalon Dogpatch
San Francisco, CA
326

 
203.4

 
Q4 2015
 
Q4 2017
 
Q3 2018
 
Q1 2019
19.
 
Avalon Easton
Easton, MA
290

 
64.0

 
Q1 2016
 
Q2 2017
 
Q1 2018
 
Q3 2018
20.
 
Avalon Somers
Somers, NY
152

 
45.1

 
Q2 2016
 
Q3 2017
 
Q1 2018
 
Q3 2018
21.
 
AVA North Point (7)
Cambridge, MA
265

 
113.9

 
Q2 2016
 
Q1 2018
 
Q4 2018
 
Q2 2019
22.
 
Avalon Boonton
Boonton, NJ
350

 
91.2

 
Q3 2016
 
Q2 2019
 
Q1 2020
 
Q3 2020
23.
 
11 West 61st Street (4)
New York, NY
172

 
603.7

 
Q4 2016
 
Q2 2019
 
Q4 2019
 
Q2 2020
24.
 
Avalon Belltown Towers (4)
Seattle, WA
275

 
146.9

 
Q4 2016
 
Q3 2019
 
Q4 2019
 
Q2 2020
25.
 
Avalon Public Market
Emeryville, CA
285

 
139.6

 
Q4 2016
 
Q3 2018
 
Q1 2019
 
Q3 2019
26.
 
Avalon Teaneck
Teaneck, NJ
248

 
70.4

 
Q4 2016
 
Q4 2018
 
Q2 2019
 
Q4 2019
27.
 
AVA Hollywood (4)
Hollywood, CA
695

 
365.1

 
Q4 2016
 
Q2 2019
 
Q2 2020
 
Q4 2020
 
 
Total
9,129

 
$
4,045.0

 
 
 
 
 
 
 
 
_________________________________
(1)
Projected total capitalized cost includes all capitalized costs projected to be or actually incurred to develop the respective Development Community, determined in accordance with GAAP, including land acquisition costs, construction costs, real estate taxes, capitalized interest and loan fees, permits, professional fees, allocated development overhead and other regulatory fees.  Projected total capitalized cost for communities identified as having joint venture ownership, either during construction or upon construction completion, represents the total projected joint venture contribution amount.

23


(2)
Initial projected occupancy dates are estimates.  There can be no assurance that we will pursue to completion any or all of these proposed developments.
(3)
Stabilized operations is defined as the earlier of (i) attainment of 95% or greater physical occupancy or (ii) the one-year anniversary of completion of development.
(4)
Developments containing at least 10,000 square feet of retail space include Avalon Huntington Beach (10,000 square feet), Avalon West Hollywood (32,000 square feet), Avalon Esterra Park (17,000 square feet), Avalon Newcastle Commons I (15,000 square feet), 11 West 61st Street (67,000 square feet), Avalon Belltown Towers (11,000 square feet) and AVA Hollywood (19,000 square feet).
(5)
We are developing this project with a private development partner. We will own the rental portion of the development on floors 3 through 19 and the partner will own the for-sale condominium portion on floors 20 through 30 of the development. The information above represents only our portion of the project. We are providing a construction loan to the development partner, expected to be $48,800,000 which together with the partner's contributed equity is expected to fund the condominium portion of the project. A more detailed description of Avalon Sheepshead Bay can be found in Note 5, “Investments in Real Estate Entities,” of the Consolidated Financial Statements set forth in Item 8 of this report.
(6)
In February 2017, a fire occurred at at Avalon Maplewood. See "Insurance and Risk of Uninsured Losses" for further discussion.
(7)
We are developing this project within a joint venture that was formed in July 2016, in which we own a 55.0% interest. The information above represents the total cost for the venture.

During the year ended December 31, 2016, the Company completed the development of the following communities:

 
Number of
apartment
homes
 
Total capitalized 
cost (1)
($ millions)
 
Approximate rentable area
(sq. ft.)
 
Total capitalized cost per sq. ft.
 
Quarter of completion
1.
 
Avalon Falls Church
Falls Church, VA
384

 
$
106.3

 
396,536

 
$
268

 
Q1 2016
2.
 
Avalon Glendora
Glendora, CA
280

 
83.5

 
266,226

 
$
314

 
Q1 2016
3.
 
Avalon Green III
Elmsford, NY
68

 
22.3

 
77,722

 
$
287

 
Q1 2016
4.
 
AVA Capitol Hill (2)
Seattle, WA
249

 
81.5

 
191,488

 
$
426

 
Q2 2016
5.
 
Avalon Irvine III
Irvine, CA
156

 
55.7

 
151,363

 
$
368

 
Q2 2016
6.
 
Avalon Union
Union, NJ
202

 
50.3

 
230,418

 
$
218

 
Q2 2016
7.
 
Avalon Dublin Station II
Dublin, CA
252

 
84.6

 
243,809

 
$
347

 
Q3 2016
8.
 
Avalon Alderwood II
Lynnwood, WA
124

 
26.6

 
119,926

 
$
222

 
Q3 2016
 
 
Total
1,715

 
$
510.8

 
 
 
 

 
 
____________________________________
(1)
Total capitalized cost is as of December 31, 2016. We generally anticipate incurring additional costs associated with these communities that are customary for new developments.
(2)
Approximate rentable area includes 16,000 square feet of retail space.

Redevelopment Communities

As of December 31, 2016, there were four communities under redevelopment. We expect the total capitalized cost to redevelop these communities to be $80,700,000, excluding costs incurred prior to redevelopment. We have found that the cost to redevelop an existing apartment community is more difficult to budget and estimate than the cost to develop a new community. Accordingly, we expect that actual costs may vary from our budget by a wider range than for a new development community. We cannot assure you that we will meet our schedule for reconstruction completion or for attaining restabilized operations, or that we will meet our budgeted costs, either individually or in the aggregate. We anticipate maintaining or increasing our current level of redevelopment activity related to communities in our current operating portfolio. You should carefully review Item 1A. “Risk Factors” for a discussion of the risks associated with redevelopment activity.


24


The following presents a summary of these Redevelopment Communities:

 
 
 
 
Number of
apartment
homes
 
Projected total
capitalized cost (1)
($ millions)
 
Reconstruction
start
 
Estimated
reconstruction
completion
 
Estimated
restabilized
operations (2)
1.
 
Avalon at Arlington Square
Arlington, VA
 
842

 
$
32.8

 
Q4 2014
 
Q3 2017
 
Q1 2018
2.
 
AVA Studio City I
Studio City, CA
 
450

 
28.3

 
Q1 2016
 
Q2 2017
 
Q4 2017
3.
 
Avalon Towers on the Peninsula
Mountain View, CA
 
211

 
13.5

 
Q2 2016
 
Q1 2017
 
Q3 2017
4.
 
Avalon at Edgewater
Edgewater, NJ
 
168

 
6.1

 
Q3 2016
 
Q1 2017
 
Q3 2017
 
 
Total
 
1,671

 
$
80.7

 
 
 
 
 
 
____________________________________
(1)
Projected total capitalized cost does not include capitalized costs incurred prior to redevelopment.
(2)
Restabilized operations is defined as the earlier of (i) attainment of 95% or greater physical occupancy or (ii) the one-year anniversary of completion of redevelopment.

Development Rights

At December 31, 2016, we had $84,293,000 in acquisition and related capitalized costs for direct interests in land parcels we own, and $40,179,000 in capitalized costs (including legal fees, design fees and related overhead costs) related to Development Rights for which we control the land parcel, typically through a conditional agreement or option to purchase or lease the land, as well as land associated with the building destroyed in the Edgewater (as defined below) casualty loss not considered a Development Right. Collectively, the land held for development and associated costs for deferred development rights relate to 25 Development Rights for which we expect to develop new apartment communities in the future. The cumulative capitalized costs for land held for development as of December 31, 2016 includes $63,082,000 in original land acquisition costs. The original land acquisition cost per home, after consideration of planned sales of associated outparcels and other real estate, ranged from $24,000 per home in Washington to $51,000 per home in Virginia. The Development Rights range from those beginning design and architectural planning to those that have completed site plans and drawings and can begin construction almost immediately. We estimate that the successful completion of all of these communities would ultimately add approximately 8,487 apartment homes to our portfolio. Substantially all of these apartment homes will offer features like those offered by the communities we currently own.

For 18 Development Rights, we control the land through a conditional agreement or option to purchase or lease the parcel. While we generally prefer to hold Development Rights through conditional agreements or options to acquire land, for the five remaining Development Rights we either currently own the land, have an ownership interest in a joint venture that owns the land or have executed a long term land lease for the parcel of land on which a community would be built if we proceeded with development. In addition, two Development Rights are additional development phases of existing stabilized operating communities we own, and will be constructed on land currently associated with those operating communities. During the next 12 months we expect to commence construction of apartment communities on three of the Development Rights for which we currently own the land, with a carrying basis of $49,584,000.

The properties comprising the Development Rights are in different stages of the due diligence and regulatory approval process. The decisions as to which of the Development Rights to invest in, if any, or to continue to pursue once an investment in a Development Right is made, are business judgments that we make after we perform financial, demographic and other analyses. In the event that we do not proceed with a Development Right, we generally would not recover any of the capitalized costs incurred in the pursuit of those communities, unless we were to recover amounts in connection with the sale of land; however, we cannot guarantee a recovery. Pre-development costs incurred in the pursuit of Development Rights, 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 no longer probable, any capitalized pre-development costs are charged to expense. During 2016, we incurred a charge of approximately $4,183,000 for development pursuits that were not yet probable of future development at the time incurred, or for pursuits that we determined would not likely be developed.

You should carefully review Item 1A. “Risk Factors,” for a discussion of the risks associated with Development Rights.


25


The following presents a summary of the Development Rights:

Market
 
Number of rights
 
Estimated
number of homes
 
Projected total
capitalized cost ($ millions) (1)
 
 
 
 
 
 
 
New England
 
6

 
1,409

 
$
481

Metro NY/NJ
 
9

 
4,065

 
1,396

Mid-Atlantic
 
2

 
723

 
217

Pacific Northwest
 
3

 
911

 
238

Northern California
 
4

 
904

 
458

Southern California
 
1

 
475

 
238

Total
 
25

 
8,487

 
$
3,028

____________________________________
(1)
Projected total capitalized cost includes all capitalized costs incurred to date (if any) and projected to be incurred to develop the respective community, determined in accordance with GAAP, including land acquisition costs, construction costs, real estate taxes, capitalized interest and loan fees, permits, professional fees, allocated development overhead and other regulatory fees.

Land Acquisitions

We select land for development and follow established procedures that we believe minimize both the cost and the risks of development. During 2016 we acquired land parcels for eight Development Rights, as shown in the table below, for an aggregate investment of $101,372,000. For all of the parcels, construction has either started or is expected to start within the next 12 months.

 
 
 
Estimated
number of
apartment
homes
 
Projected total
capitalized
cost (1)
($ millions)
 
Date
acquired
1.
 
Avalon Easton
Easton, MA
290

 
$
64.0

 
March 2016
2.
 
Avalon Boonton
Boonton, NJ
350

 
91.2

 
April 2016
3.
 
Avalon Belltown Towers
Seattle, WA
275

 
146.9

 
April 2016
4.
 
Avalon Somers
Somers, NY
152

 
45.1

 
June 2016
5.
 
Avalon Public Market
Emeryville, CA
285

 
139.6

 
November 2016
6.
 
Avalon Teaneck
Teaneck, NJ
248

 
70.4

 
December 2016
7.
 
Avalon Esterra Park Phase II
Redmond, WA
323

 
89.6

 
December 2016
8.
 
Avalon Piscataway
Piscataway, NJ
360

 
89.9

 
December 2016
 
 
Total
2,283

 
$
736.7

 
 
____________________________________
(1)
Projected total capitalized cost includes all capitalized costs incurred to date (if any) and projected to be incurred to develop the respective community, determined in accordance with GAAP, including land and related acquisition costs, construction costs, real estate taxes, capitalized interest and loan fees, permits, professional fees, allocated development overhead and other regulatory fees, net of projected proceeds for any planned sales of associated outparcels and other real estate.

26



Other Land and Real Estate Assets

We own land parcels with a carrying value of $46,958,000, which we do not currently plan to develop, of which $20,846,000 was under contract to be sold as of December 31, 2016 and was disposed of in January 2017. These parcels consist of both ancillary parcels acquired in connection with Development Rights that we had not planned to develop and land parcels we acquired for development and now intend to sell. During 2016, we recognized an aggregate impairment charge of $10,500,000 relating to three ancillary land parcels which we either sold during the year or intend to sell as of the date of this report. We believe that the current carrying value for all other land parcels is such that there is no indication of impaired value, or further need to record a charge for impairment in the case of assets previously impaired. However, we may be subject to the recognition of further charges for impairment in the event that there are future indicators of such impairment and we determine that the carrying value of the assets is greater than the current fair value, less costs to dispose.

Disposition Activity

We sell assets when they do not meet our long-term investment strategy or when capital and real estate markets allow us to realize a portion of the value created over the past business cycle and generally redeploy the proceeds from those sales to develop, redevelop and acquire communities. Pending such redeployment, we will generally use the proceeds from the sale of these communities to reduce amounts outstanding under our Credit Facility or retain the cash proceeds on our balance sheet until it is redeployed into acquisition, development or redevelopment activity. On occasion, we will set aside the proceeds from the sale of communities into a cash escrow account to facilitate a tax deferred, like-kind exchange transaction. From January 1, 2016 to January 31, 2017, we sold our interest in seven wholly-owned communities, containing 2,051 apartment homes. The aggregate gross sales price for these assets was $522,850,000.

Insurance and Risk of Uninsured Losses

We maintain commercial general liability insurance and property insurance with respect to all of our communities. These policies, along with other insurance policies we maintain, have policy specifications, insured and self-insured limits, exclusions and deductibles that we consider commercially reasonable. There are, however, certain types of losses (such as losses arising from nuclear liability or acts of war) that are not insured, in full or in part, because they are either uninsurable or the cost of insurance makes it, in management’s view, economically impractical. You should carefully review the discussion under Item 1A. “Risk Factors” of this Form 10-K for a discussion of risks associated with an uninsured property or liability loss.

Many of our West Coast communities are located in the general vicinity of active earthquake faults. Many of our communities are near, and thus susceptible to, the major fault lines in California, including the San Andreas Fault, the Hayward Fault or other geological faults that are known or unknown. We cannot assure you that an earthquake would not cause damage or losses greater than our current insured levels. We procure property damage and resulting business interruption insurance coverage with limits of $175,000,000 for any single occurrence and in the annual aggregate for losses resulting from earthquakes. However for communities located in California or Washington, the limit is $150,000,000 for any single occurrence and in the annual aggregate for losses resulting from earthquakes. The deductible applicable to losses resulting from earthquakes occurring in California is five percent of the insured value of each damaged building subject to a minimum of $100,000 and a maximum of $25,000,000 per loss.

Our communities are insured for property damage and business interruption losses through a combination of community specific insurance policies and/or coverage provided under a master property insurance policy covering the majority of our communities. The master policy provides a $400,000,000 limit for any single occurrence, subject to certain sublimits and exclusions. Under the master policy we are subject to a $100,000 deductible per occurrence, as well as additional self-insured retention for the next $350,000 of loss, per occurrence, until the aggregate incurred self-insured retention exceeds $1,500,000 for the policy year.
  
Our communities are insured for third-party liability losses through a combination of community specific insurance policies and/or coverage provided under a master commercial general liability and umbrella/excess insurance policies. The master commercial general liability and umbrella/excess insurance policies cover the majority of our communities and are subject to certain coverage limitations and exclusions, and require a self-insured retention of $250,000 per occurrence.

We utilize a wholly-owned captive insurance company to insure certain risks, which includes property damage and resulting business interruption losses and other construction related liability risks. The captive is directly responsible for 12% of the losses incurred by the master property insurance policy, on a per occurrence basis, in excess of any applicable deductibles up to the first $50,000,000 of loss.


27


Just as with office buildings, transportation systems and government buildings, there have been reports that apartment communities could become targets of terrorism. In January 2015, the President signed the Terrorism Risk Insurance Program Reauthorization Act (“TRIPRA”) which extended a program that is designed to make terrorism insurance available through a federal back-stop program. Certain communities are insured for terrorism related losses through this federal program. We have also purchased private-market insurance for property damage due to terrorism with limits of $600,000,000 per occurrence and in the annual aggregate that includes certain coverages (not covered under TRIPRA) such as domestic-based terrorism. This insurance, often referred to as “non-certified” terrorism insurance, is subject to deductibles, limits and exclusions. Our general liability policy provides terrorism coverage through TRIPRA (subject to deductibles and insured limits) for liability to third parties that result from terrorist acts at our communities.

An additional consideration for insurance coverage and potential uninsured losses is mold growth or other environmental contamination. Mold growth may occur when excessive moisture accumulates in buildings or on building materials, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. If a significant mold problem arises at one of our communities, we could be required to undertake a costly remediation program to contain or remove the mold from the affected community and could be exposed to other liabilities. For further discussion of the risks and our related prevention and remediation activities, please refer to the discussion under Item 1A. “Risk Factors - We may incur costs due to environmental contamination or non-compliance” elsewhere in this report. We cannot provide assurance that we will have coverage under our existing policies for property damage or liability to third parties arising as a result of exposure to mold or a claim of exposure to mold at one of our communities.

We also carry crime policies (also commonly referred to as a fidelity policy or employee dishonesty policy) and limited cyber liability insurance. The crime policies protect us, up to $30,000,000 per occurrence (subject to sublimits and exclusions), from employee theft of money, securities or property. The limited cyber liability insurance is part of our professional liability coverage and has limits of $15,000,000 per occurrence and in the annual aggregate. The cyber liability coverage protects us from certain claims arising out of data breach, wrongful acts, data privacy issues and media liability.

The amount of insurance we maintain may not be sufficient to cover losses.

Maplewood Casualty Loss

In February 2017, a fire occurred at our Avalon Maplewood Development Community, located in Maplewood, NJ, which was under construction and not yet occupied. We are currently assessing our direct losses resulting from the fire, which could vary based on costs and time to rebuild the portion of the Development Community that was destroyed and/or damaged, as well as our potential liability to third parties who may have incurred damages on account of the fire. While we currently believe that our direct losses and any potential liability to third parties will be substantially covered by our insurance policies, including coverage for the replacement cost of the building, third party claims and business interruption loss, subject to deductibles as well as a self-insured portion of the property insurance for which we are obligated for 12% of the first $50,000,000 in losses, we can give no assurances in this regard and continue to evaluate this matter.

Edgewater Casualty Loss

In January 2015, a fire occurred at our Avalon at Edgewater apartment community located in Edgewater, NJ (“Edgewater”). Edgewater consisted of two residential buildings. One building, containing 240 apartment homes, was destroyed. The second building, containing 168 apartment homes, suffered minimal damage and has been repaired. In January 2016, we reached a final settlement with our property and casualty insurers regarding the property damage and lost income related to the Edgewater casualty loss, for which we received aggregate insurance proceeds of $73,150,000, after self-insurance and deductibles. We received $44,142,000 of these recoveries in 2015, and the remaining $29,008,000 in 2016, of which $8,702,000 was recognized as an additional net casualty gain and $20,306,000 as business interruption insurance proceeds.

To date, a number of lawsuits on behalf of former residents have been filed against us, including five purported class actions, 21 individual actions and other subrogation actions by insurers who provided renters insurance to our residents. Having incurred applicable deductibles, we currently believe that all of our remaining liability to third parties will not be material and will in any event be substantially covered by our insurance policies. However, we can give no assurances in this regard and continue to evaluate this matter.



28


ITEM 3.    LEGAL PROCEEDINGS

As discussed immediately above, in January 2015, a fire occurred at the Company's Avalon at Edgewater apartment community in Edgewater, NJ. The Company believes that the fire was caused by sparks from a torch used during repairs being performed by a Company employee who was not a licensed plumber. The Company has since revised its maintenance policies to require that non-flame tools be used for plumbing repairs where possible or, where not possible inside the building envelope, that a qualified third party vendor perform the work in accordance with AvalonBay policies.

The Company has established protocols for processing claims from third parties who suffered losses as a result of the fire, and many third parties have contacted the Company's insurance carrier and settled their claims. Through the date of this Form 10-K, of the 229 occupied apartments destroyed in the fire, the residents of approximately 97 units have settled claims with the Company's insurer, and claims from an additional approximate 34 units are being evaluated by the Company's insurer.

Three class action lawsuits have been filed against the Company on behalf of occupants of the destroyed building and consolidated in the United States District Court for the District of New Jersey. The Company has agreed with class counsel to the terms of a proposed settlement which would provide a claims process (with agreed upon protocols for instructing the adjuster as to how to evaluate claims) and, if needed, an arbitration process to determine damage amounts to be paid to individual claimants covered by the class settlement. On December 9, 2016, class counsel re-filed with the court a motion for preliminary approval of this class settlement, and the Company did not oppose such motion. The Company cannot predict when or if the court will approve the settlement. A fourth class action, being heard in the same federal court, was filed against the Company on behalf of residents of the second Edgewater building that suffered minimal damage. Recently, a fifth class action lawsuit was filed against the Company seeking to certify a class on behalf of both buildings and other third parties. The Company removed this action to the same federal court as the other four and is currently seeking to consolidate it with the fourth class action lawsuit (referenced above). In addition to the class action lawsuits described above, 21 lawsuits representing approximately 150 individual plaintiffs have been filed in the Superior Court of New Jersey Bergen County - Law Division and 20 of these lawsuits are currently pending. Most of the state court cases have been consolidated by the court and the Company expects all of them to be consolidated shortly. The Company believes that it has meritorious defenses to the extent of damages claimed in all of the suits. There are also five subrogation lawsuits that have been filed against the Company by insurers of Edgewater residents who obtained renters insurance; it is the Company’s position that in the majority of the applicable leases the residents waived subrogation rights. One of these lawsuits has been dismissed on that basis and the other four are currently pending in the United States District Court for the District of New Jersey. The District Court recently denied the Company's motion to dismiss which was filed in one of these lawsuits and the Company is currently seeking reconsideration of that decision as well as certification to appeal.

Having settled many third party claims through the insurance claims process, the Company currently believes that any potential remaining liability to third parties (including any potential liability to third parties determined in accordance with the class settlement described above, if approved) will not be material to the Company and will in any event be substantially covered by the Company's insurance policies. However, the Company can give no assurances in this regard and continues to evaluate this matter.

The Company is involved in various other claims and/or administrative proceedings unrelated to the Edgewater casualty loss that arise in the ordinary course of its business. While no assurances can be given, the Company does not currently believe that any of these other outstanding litigation matters, individually or in the aggregate, will have a material adverse effect on its financial condition or results of operations.

ITEM 4.    MINE SAFETY DISCLOSURES

Not Applicable.


29


PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded on the NYSE under the ticker symbol AVB. The following table sets forth the quarterly high and low sales prices per share of our common stock for the years 2016 and 2015, as reported by the NYSE. On January 31, 2017 there were 484 holders of record of an aggregate of 137,330,988 shares of our outstanding common stock. The number of holders does not include individuals or entities who beneficially own shares but whose shares are held of record by a broker or clearing agency, but does include each such broker or clearing agency as one record holder.

 
 
2016
 
2015
 
 
Sales Price
 
Dividends
declared
 
Sales Price
 
Dividends
declared
 
 
High
 
Low
 
High
 
Low
 
Quarter ended March 31
 
$
190.49

 
$
160.66

 
$
1.35

 
$
181.69

 
$
163.81

 
$
1.25

Quarter ended June 30
 
$
192.29

 
$
166.59

 
$
1.35

 
$
176.43

 
$
158.72

 
$
1.25

Quarter ended September 30
 
$
188.00

 
$
168.57

 
$
1.35

 
$
180.24

 
$
158.97

 
$
1.25

Quarter ended December 31
 
$
177.77

 
$
158.32

 
$
1.35

 
$
186.89

 
$
168.83

 
$
1.25


At present, we expect to continue our policy of paying regular quarterly cash dividends. However, the form, timing and/or amount of dividend distributions will be declared at the discretion of the Board of Directors and will depend on actual cash from operations, our financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code and other factors as the Board of Directors may consider relevant. The Board of Directors may modify our dividend policy from time to time.

In February 2017, we announced that our Board of Directors declared a dividend on our common stock for the first quarter of 2017 of $1.42 per share, a 5.2% increase over the previous quarterly dividend per share of $1.35. The dividend will be payable on April 17, 2017 to all common stockholders of record as of March 31, 2017.

Issuer Purchases of Equity Securities
Period
 
(a)
Total Number
of Shares
Purchased(1)
 
(b)
Average
Price Paid
per Share
 
(c)
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
 
(d)
Maximum Dollar
Amount that May Yet
be Purchased Under
the Plans or Programs
(in thousands) (2)
October 1 - October 31, 2016
 
137

 
$
165.63

 

 
$
200,000

November 1 - November 30, 2016
 

 
$

 

 
$
200,000

December 1 - December 31, 2016
 
102

 
$
168.77

 

 
$
200,000

_________________________________
(1)
Reflects shares surrendered to the Company in connection with exercise of stock options as payment of exercise price, as well as for taxes associated with the vesting of restricted share grants.
(2)
As disclosed in our Form 10-Q for the quarter ended March 31, 2008, represents amounts outstanding under the Company's $500,000,000 Stock Repurchase Program. There is no scheduled expiration date to this program.

Information regarding securities authorized for issuance under equity compensation plans is included in the section entitled Item 12. “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” in this Form 10-K.


30


ITEM 6.    SELECTED FINANCIAL DATA

The following table provides historical consolidated financial, operating and other data for the Company. You should read the table with our Consolidated Financial Statements and the Notes included in this report (dollars in thousands, except per share data).
 
For the year ended
 
12/31/16
 
12/31/15
 
12/31/14
 
12/31/13
 
12/31/12
Operating data:
 

 
 

 
 

 
 

 
 

Total revenue
$
2,045,255

 
$
1,856,028

 
$
1,685,061

 
$
1,462,921

 
$
1,000,627

Gain on sale of real estate
$
384,847

 
$
125,272

 
$
85,415

 
$
240

 
$
280

Income from continuing operations
$
1,033,708

 
$
741,733

 
$
659,148

 
$
57,827

 
$
250,431

Total discontinued operations
$

 
$

 
$
38,179

 
$
294,944

 
$
173,131

Net income
$
1,033,708

 
$
741,733

 
$
697,327

 
$
352,771

 
$
423,562

Net income attributable to common stockholders
$
1,034,002

 
$
742,038

 
$
683,567

 
$
353,141

 
$
423,869

 
 
 
 
 
 
 
 
 
 
Per Common Share and Share Information:
 
 
 
 
 
 
 
 
 
Earnings per common share—basic:
 
 
 
 
 
 
 
 
 
Income from continuing operations attributable to common stockholders (net of dividends attributable to preferred stock)
$
7.53

 
$
5.54

 
$
4.93

 
$
0.46

 
$
2.57

Discontinued operations attributable to common stockholders

 

 
0.29

 
2.32

 
1.77

Net income attributable to common stockholders
$
7.53

 
$
5.54

 
$
5.22

 
$
2.78

 
$
4.34

Weighted average shares outstanding—basic (1)
136,928,251

 
133,565,711

 
130,586,718

 
126,855,754

 
97,416,401

 
 
 
 
 
 
 
 
 
 
Earnings per common share—diluted:
 
 
 
 
 
 
 
 
 
Income from continuing operations attributable to common stockholders (net of dividends attributable to preferred stock)
$
7.52

 
$
5.51

 
$
4.92

 
$
0.46

 
$
2.55

Discontinued operations attributable to common stockholders

 

 
0.29

 
2.32

 
1.77

Net income attributable to common stockholders
$
7.52

 
$
5.51

 
$
5.21

 
$
2.78

 
$
4.32

Weighted average shares outstanding—diluted
137,461,637

 
134,593,177

 
131,237,502

 
127,265,903

 
98,025,152

 
 
 
 
 
 
 
 
 
 
Cash dividends declared
$
5.40

 
$
5.00

 
$
4.64

 
$
4.28

 
$
3.88

 
 
 
 
 
 
 
 
 
 
Other Information:
 

 
 

 
 

 
 

 
 

Net income attributable to common stockholders
$
1,034,002

 
$
742,038

 
$
683,567

 
$
353,141

 
$
423,869

Depreciation—continuing operations
531,434

 
477,923

 
442,682

 
560,215

 
243,680

Depreciation—discontinued operations

 

 

 
13,500

 
16,414

Interest expense, net—continuing operations (2)
194,585

 
148,879

 
181,030

 
238,323

 
138,099

Interest expense, net—discontinued operations (2)

 

 

 

 
735

Income tax expense
305

 
1,483

 
9,368

 

 

EBITDA (3)
$
1,760,326

 
$
1,370,323


$
1,316,647


$
1,165,179


$
822,797

 
 
 
 
 
 
 
 
 
 
Funds from Operations (4)
$
1,135,762

 
$
1,083,085

 
$
951,035

 
$
642,814

 
$
521,047

Core Funds from Operations (4)
$
1,125,341

 
$
1,016,035

 
$
890,081

 
$
792,888

 
$
532,490

Number of Current Communities (5)
258

 
259

 
251

 
244

 
180

Number of apartment homes
74,538

 
75,584

 
73,963

 
72,811

 
52,792

 
 
 
 
 
 
 
 
 
 
Balance Sheet Information:
 

 
 

 
 

 
 

 
 

Real estate, before accumulated depreciation
$
20,776,626

 
$
19,268,099

 
$
17,849,316

 
$
16,800,321

 
$
10,071,342

Total assets
$
17,867,271

 
$
16,931,305

 
$
16,140,578

 
$
15,292,922

 
$
11,128,662

Notes payable and unsecured credit facilities, net
$
7,030,880

 
$
6,456,948

 
$
6,489,707

 
$
6,110,083

 
$
3,819,617

 
 
 
 
 
 
 
 
 
 
Cash Flow Information:
 

 
 

 
 

 
 

 
 

Net cash flows provided by operating activities
$
1,143,484

 
$
1,056,754

 
$
886,641

 
$
724,315

 
$
540,819

Net cash flows used in investing activities
$
(1,037,352
)
 
$
(1,199,517
)
 
$
(816,760
)
 
$
(1,181,174
)
 
$
(623,386
)
Net cash flows (used in) provided by financing activities
$
(291,645
)
 
$
33,810

 
$
158,224

 
$
(1,995,404
)
 
$
2,199,332


31


_________________________________
(1)
Amounts do not include unvested restricted shares included in the calculation of Earnings per Share. Please refer to Note 1, “Organization, Basis of Presentation and Significant Accounting Policies—Earnings per Common Share,” of the Consolidated Financial Statements set forth in Item 8 of this report for a discussion of the calculation of Earnings per Share.
(2)
Interest expense, net includes any gain or loss incurred from the extinguishment of debt.
(3)
EBITDA is defined as net income before interest income and expense, income taxes, depreciation and amortization from both continuing and discontinued operations. Under this definition, EBITDA includes gains on sale of assets and gain on sale of partnership interests. Management generally considers EBITDA to be an appropriate supplemental measure to net income of our operating performance because it helps investors to understand our ability to incur and service debt and to make capital expenditures. EBITDA should not be considered as an alternative to net income (as determined in accordance with GAAP), as an indicator of our operating performance, or to cash flows from operating activities (as determined in accordance with GAAP) as a measure of liquidity. Our calculation of EBITDA may not be comparable to EBITDA as calculated by other companies.
(4)
Refer to “Reconciliation of Non-GAAP Financial Measures” below.
(5)
Current Communities consist of all communities other than those which are still under construction and for which a certificate or certificates of occupancy for the entire community have not been received.

Reconciliation of Non-GAAP Financial Measures

Funds from Operations, or “FFO,” and FFO adjusted for non-core items, or “Core FFO,” as defined below, are generally considered by management to be appropriate supplemental measures of our operating and financial performance. In calculating FFO, we exclude gains or losses related to dispositions of previously depreciated property and exclude real estate depreciation, which can vary among owners of identical assets in similar condition based on historical cost accounting and useful life estimates. FFO can help one compare the operating performance of a real estate company between periods or as compared to different companies. By further adjusting for items that are not considered part of our core business operations, Core FFO allows one to compare the core operating performance of the Company year over year. We believe that in order to understand our operating results, FFO and Core FFO should be examined with net income as presented in the Consolidated Statements of Comprehensive Income included elsewhere in this report.

Consistent with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts® (“NAREIT”), we calculate FFO as net income or loss attributable to common stockholders computed in accordance with GAAP, adjusted for:

gains or losses on sales of previously depreciated operating communities;
cumulative effect of change in accounting principle;
impairment write-downs of depreciable real estate assets;
write-downs of investments in affiliates due to a decrease in the value of depreciable real estate assets held by those affiliates;
depreciation of real estate assets; and
adjustments for unconsolidated partnerships and joint ventures.

We calculate Core FFO as FFO, adjusted for:

joint venture gains, costs, and promoted interests;
casualty and impairment losses or gains, net;
gains or losses from early extinguishment of consolidated borrowings;
business interruption and property and casualty insurance proceeds and legal settlements;
gains or losses on sales of assets not subject to depreciation;
expensed acquisition costs related to business acquisitions that occurred prior to the adoption of ASU 2017-01 as discussed in Note 1, “Organization, Basis of Presentation and Significant Accounting Policies,” of the Consolidated Financial Statements set forth in Item 8 of this report;
abandoned pursuits;
severance related costs; and
other non-core items.

FFO and Core FFO do not represent net income in accordance with GAAP, and therefore should not be considered an alternative to net income, which remains the primary measure, as an indication of our performance. In addition, FFO and Core FFO as calculated by other REITs may not be comparable to our calculations of FFO and Core FFO.


32


FFO and Core FFO also do not represent cash generated from operating activities in accordance with GAAP, and therefore should not be considered an alternative to net cash flows from operating activities, as determined by GAAP, as a measure of liquidity. Additionally, it is not necessarily indicative of cash available to fund cash needs. A presentation of GAAP based cash flow metrics is provided in “Cash Flow Information” in the table above.

The following is a reconciliation of net income attributable to common stockholders to FFO attributable to common stockholders and to Core FFO attributable to common stockholders (dollars in thousands, except per share data).

 
For the year ended
 
12/31/16
 
12/31/15
 
12/31/14
 
12/31/13
 
12/31/12
Net income attributable to common stockholders
$
1,034,002

 
$
742,038

 
$
683,567

 
$
353,141

 
$
423,869

Depreciation—real estate assets, including discontinued operations and joint venture adjustments
538,606

 
486,019

 
449,769

 
582,325

 
265,627

Distributions to noncontrolling interests, including discontinued operations
41

 
38

 
35

 
32

 
28

Gain on sale of unconsolidated entities holding previously depreciated real estate assets
(58,069
)
 
(33,580
)
 
(73,674
)
 
(14,453
)
 
(7,972
)
Gain on sale of previously depreciated real estate assets (1)
(374,623
)
 
(115,625
)
 
(108,662
)
 
(278,231
)
 
(146,311
)
Gain on acquisition of unconsolidated real estate entity

 

 

 

 
(14,194
)
Casualty and impairment (recovery) loss, net on real estate (2) (6)
(4,195
)
 
4,195

 

 

 

FFO attributable to common stockholders
$
1,135,762

 
$
1,083,085

 
$
951,035

 
$
642,814

 
$
521,047

 
 
 
 
 
 
 
 
 
 
Adjusting items:


 


 


 


 


Joint venture losses (gains) (3)
6,031

 
(9,059
)
 
(5,194
)
 
35,554

 
(940
)
Impairment loss on real estate (4) (6)
10,500

 
800

 

 

 

Casualty (gain) loss, net on real estate (5) (6)
(10,239
)
 
(15,538
)
 

 

 
3,321

Business interruption insurance proceeds (7)
(20,565
)
 
(1,509
)
 
(2,494
)
 
(299
)
 

Lost NOI from casualty losses covered by business interruption insurance (8)
7,366

 
7,862

 

 

 

Loss (gain) on extinguishment of consolidated debt
7,075

 
(26,736
)
 
412

 
14,921

 
2,070

Acquisition costs (9)
3,523

 
3,806

 
(7,682
)
 
44,052

 
9,965

Severance related costs
852

 
1,999

 
815

 
3,580

 
587

Development pursuit and other write-offs
3,662

 
1,838

 
2,564

 
1,506

 

Joint venture promote (10)
(7,985
)
 
(21,969
)
 
(58,128
)
 

 
(4,055
)