7. Commitments and Contingencies

The Archstone Acquisition

In November 2012, the Company entered into agreements with (i) Equity Residential and its operating partnership, ERP Operating Partnership LP ("Equity Residential"), (ii) Lehman Brothers Holdings, Inc., ("Lehman"), and (iii) Archstone Enterprise LP ("Archstone"), pursuant to which AvalonBay and Equity Residential will acquire, directly or indirectly, all of the assets and entities owned by, and all of the liabilities of, Archstone. Under the terms of the agreements, the Company will acquire approximately 40% of Archstone's asset and liabilities and Equity Residential will acquire approximately 60% of Archstone's assets and liabilities ("Archstone Acquisition"). The transaction is expected to close during the first quarter of 2013.

The Company expects to purchase the following as part of the Archstone Acquisition:

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66 apartment communities that are expected to be consolidated for financial reporting purposes, containing 22,222 apartment homes, of which six communities are under construction and are expected to contain 1,666 apartment homes upon completion

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Three parcels of land, which are expected to be wholly owned, and if developed as anticipated, are expected to contain a total of 968 apartment homes;

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Interests in joint ventures, the assets of which consist primarily of real estate, for which the Company's ownership percentage is expected to be up to 40%, and that are not expected to be consolidated for financial reporting purposes.

The Company expects to provide the following consideration for the Archstone Acquisition:

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the issuance of 14,889,706 shares of its common stock to Lehman or its designees;

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cash payment of $669,000,000 to Lehman or its designees;

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the assumption of approximately $3,700,000,000 principal amount of consolidated indebtedness;

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the acquisition with Equity Residential of interests in entities that have preferred units outstanding that may be presented for redemption from time to time. The Company's 40% share of the liquidation value of and accrued dividends on these outstanding Archstone preferred units is approximately $132,200,000 at December 31, 2012; and

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the assumption with Equity Residential of all other liabilities, known or unknown, of Archstone, other than certain excluded liabilities. The Company will share in 40% of the cost of these liabilities.

Equity Residential and the Company are jointly and severally liable for most obligations to Lehman related to the Archstone Acquisition. If the Company and Equity Residential fail to close Archstone Acquisition by March 26, 2013, then Equity Residential and the Company could be liable for payment of a termination fee of $800,000,000. The closing of the transaction is also subject to customary closing conditions, which do not include the Company and Equity Residential's ability to obtain the necessary financing or lender consents for the transaction. Unless otherwise stated, all amounts and disclosures included in this Form 10-K do not include any impact from the anticipated closing of the Archstone Acquisition. The final assets acquired and consideration paid related to the Archstone Acquisition is subject to adjustment.

Employment Agreements and Arrangements

As of December 31, 2012, the Company has employment agreements with three executive officers which expire on December 31, 2015. Under the employment agreements, if the Company terminates the executive without cause the executive will be entitled to a multiple of his covered compensation, which is defined as base salary plus annual cash bonus. For two of the executives, the multiple is two times (three if the termination is in connection with a sale of the Company) and for one of the executives the multiple is one time (two if the termination is in connection with a sale of the Company). The employment agreements generally provide that it would be considered a termination without cause if the executive's title or role is reduced except as permitted by the agreement. The agreements provide, as do the standard restricted stock and option agreements used by the Company for its compensation programs, that upon a termination without cause the executive's restricted stock and options will vest.

The standard restricted stock and option agreements used by the Company in its compensation program provide that upon an employee's termination without cause or the employee's Retirement (as defined in the agreement), all outstanding stock options and restricted shares of stock held by the employee will vest, and the employee will have up to 12 months to exercise any options then held. Under the agreements, Retirement means a termination of employment and other business relationships, other than for cause, after attainment of age 50, provided that (i) the employee has worked for the Company for at least 10 years, (ii) the employee's age at Retirement plus years of employment with the Company equals at least 70, (iii) the employee provides at least six months written notice of his intent to retire, and (iv) the employee enters into a one year non-compete and employee non-solicitation agreement.

The Company also has an Officer Severance Program (the "Program"), which applies only in connection with a sale of the Company for the benefit of those officers of the Company who do not have employment agreements. Under the Program, in the event an officer who is not otherwise covered by a severance arrangement is terminated (other than for cause), or the officer chooses to terminate his or her employment for good reason (as defined), in either case within 18 months following a sale event (as defined) of the Company, such officer will generally receive a cash lump sum payment equal to a multiple of the officer's covered compensation (base salary plus annual cash bonus). The multiple is one times for vice presidents and senior vice presidents, two times for executive vice presidents and the CFO, and three times for the CEO. The officer's restricted stock and options would also vest. Costs related to the Company's employment agreements and the Program are deferred and recognized over the requisite service period when considered by management to be probable and estimable.

Construction and Development Contingencies

In 2007 the Company entered into a commitment to acquire parcels of land in Brooklyn, New York for an aggregate purchase price of approximately $111,000,000, subject to escalations based on the timing of the acquisitions. During 2012 the Company purchased the remaining parcels under the commitment for $27,709,000, satisfying its obligation under the commitment.

Legal Contingencies

The Company accounts for recoveries from legal matters as a reduction in the legal and related costs incurred associated with the matter, with recoveries in excess of these costs reported as a gain or, where appropriate, a reduction in the basis of a community to which the suit related. During the year ended December 31, 2011, the Company recognized receipt of settlement proceeds of $1,303,000, related to environmental contamination matters pursued by the Company, reported as a reduction in the consolidated capitalized basis of the related communities.

In addition, the Company is subject to various other legal proceedings and claims that arise in the ordinary course of business. These matters are frequently covered by insurance. If it has been determined that a loss is probable to occur and can be reasonably estimated, the estimated amount of the loss is recorded in the financial statements. While the resolution of these other matters cannot be predicted with certainty, management currently believes the final outcome of such matters will not have a material adverse effect on the financial position or results of operations of the Company. In instances where the Company has a gain contingency associated with legal proceedings, the Company records a gain in the financial statements, to the extent of a loss recovery, when it is deemed probable to occur, can be reasonably estimated and is considered to be collectible.

Lease Obligations

The Company owns 11 apartment communities, four communities under construction and two commercial properties, which are located on land subject to land leases expiring between October 2026 and March 2142. Of these leases 14 are accounted for as operating leases recognizing rental expense on a straight-line basis over the lease term. These leases have varying escalation terms, and four of these leases have purchase options exercisable through 2095. The Company incurred costs of $17,604,000, $16,887,000, and $35,356,000 in the years ended December 31, 2012, 2011 and 2010, respectively, related to operating leases. In addition, the Company has one apartment community and two Development Communities located on land subject to a land lease, which are accounted for as capital leases, with a lease obligation of $36,005,000 reported as a component of accrued expenses and other liabilities. Each of these leases have purchase options exercisable through 2046. In addition, the Company leases certain office space, which are accounted for as operating leases.

The following table details the future minimum lease payments under the Company's current leases (dollars in thousands):

	Payments due by period

	2013		2014		2015		2016		2017		Thereafter
Operating Lease Obligations	$	17,996	$	18,443	$	18,390	$	18,182	$	17,668	$	1,178,392
Capital Lease Obligations(1)	$	2,427	$	2,667	$	1,954	$	19,154	$	921	$	43,366

	$	20,423	$	21,110	$	20,344	$	37,336	$	18,589	$	1,221,758

(1): Aggregate capital lease payments include $35,728 in interest costs.