Investments in Real Estate Entities

9 Months Ended

Sep. 30, 2013

Investments in Real Estate Entities

Investments in Real Estate Entities

6.  Investments in Real Estate Entities

Investment in unconsolidated entities

As of September 30, 2013, including the interests in joint ventures acquired in the Archstone Acquisition, and excluding interest in the Residual JV, the Company had investments in seven unconsolidated real estate entities with ownership interest percentages ranging from 15.2% to 31.3%. The Company accounts for its investments in unconsolidated real estate entities under the equity method of accounting. The significant accounting policies of the Company’s unconsolidated real estate entities are consistent with those of the Company in all material respects.

During the three months ended September 30, 2013, AvalonBay Value Added Fund, LP (“Fund I”), a real estate discretionary investment fund in which the Company has an interest of approximately 15.2%, sold Avalon at Cedar Place, located in Columbia, MD.  Avalon at Cedar Place, containing 156 homes, was sold for $26,000,000.  The Company’s share of the gain in accordance with GAAP for the disposition was $688,000.

During the three months ended September 30, 2013, the Company disposed of its interest in a for-sale joint venture, which held non-depreciable real estate assets, recognizing a gain in accordance with GAAP of $975,000, reported as a component of Equity in income (loss) of unconsolidated entities on the accompanying Condensed Consolidated Statements of Comprehensive Income.  Previously, the Company recognized an impairment charge of $1,955,000 associated with this venture.

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

	9-30-13		12-31-12
	(unaudited)		(unaudited)
Assets:
Real estate, net	$	2,053,602	$	1,337,084
Other assets	100,304		73,252
Total assets	$	2,153,906	$	1,410,336
Liabilities and partners’ capital:
Mortgage notes payable and credit facility	$	1,358,891	$	943,259
Other liabilities	47,717		20,405
Partners’ capital	747,298		446,672
Total liabilities and partners’ capital	$	2,153,906	$	1,410,336

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

	For the three months ended						For the nine months ended
	(unaudited)						(unaudited)
	9-30-13			9-30-12			9-30-13			9-30-12
Rental and other income	$	56,240		$	43,168		$	157,456		$	130,300
Operating and other expenses	(22,866		)	(18,733		)	(63,575		)	(56,533		)
Gain on sale of communities	5,395			44,723			70,662			57,457
Interest expense, net	(15,376		)	(12,742		)	(46,474		)	(38,468		)
Depreciation expense	(15,668		)	(11,947		)	(46,602		)	(37,244		)
Net income	$	7,725		$	44,469		$	71,467		$	55,512

In conjunction with the formation of Fund I and AvalonBay Value Added Fund II, L.P. (“Fund II”), the Company incurred costs in excess of its equity in the underlying net assets of the respective investments. These costs represent $6,237,000 at September 30, 2013 and $7,342,000 at December 31, 2012 of the respective investment balances.

As part of the formation of Fund I and Fund II, the Company provided separate and distinct guarantees to one of the limited partners in each of the ventures.  These guarantees are specific to the respective fund and any impacts or obligation of the Company to perform under one of the guarantees has no impact on the Company’s obligations with respect to the other guarantee. The guarantees provide that, if, upon final liquidation of Fund I or Fund II, the total amount of all distributions to the guaranteed partner during the life of the respective fund (whether from operating cash flow or property sales) does not equal the total capital contributions made by that partner, then the Company will pay the guaranteed partner an amount equal to the shortfall, but in no event more than 10% of the total capital contributions made by the guaranteed partner (maximum of approximately $7,500,000 for Fund I and approximately $8,910,000 for Fund II as of September 30, 2013).  As of September 30, 2013, the expected realizable values of the real estate assets owned by Fund I and Fund II are considered adequate to cover such potential payments under a liquidation scenario.  The estimated fair value of, and the Company’s obligation under, these guarantees, both at inception and as of September 30, 2013, was not significant and therefore the Company has not recorded any obligation for either of these guarantees as of September 30, 2013.

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

The Company capitalizes pre-development costs incurred in pursuit of new development opportunities for which the Company currently believes future development is probable (“Development Rights”). Future development of these Development Rights is dependent upon various factors, including zoning and regulatory approval, rental market conditions, construction costs and the availability of capital.  Initial pre-development costs incurred for pursuits for which future development is not yet considered probable are expensed as incurred.  In addition, if the status of a Development Right changes, making future development by the Company no longer probable, any capitalized pre-development costs are written off with a charge to expense.  The Company expensed costs related to the abandonment of Development Rights as well as costs incurred in pursuing the acquisition of assets or costs incurred pursuing the disposition of assets for which such disposition activity did not occur, in the amounts of $351,000 and $608,000 for the three months ended September 30, 2013 and 2012, respectively, and $792,000 and $1,749,000 for the nine months ended September 30, 2013 and 2012, respectively. These costs are included in Expensed acquisition, development, and other pursuit costs on the accompanying Condensed Consolidated Statements of Comprehensive Income. Abandoned pursuit costs can vary greatly, and the costs incurred in any given period may be significantly different in future periods.

The Company evaluates its real estate and other long-lived assets for impairment when potential indicators of impairment exist. Such assets are stated at cost, less accumulated depreciation and amortization, unless the carrying amount of the asset is not recoverable. If events or circumstances indicate that the carrying amount of a long-lived asset may not be recoverable, the Company assesses its recoverability by comparing the carrying amount of the long-lived asset to its estimated undiscounted future cash flows. If the carrying amount exceeds the aggregate undiscounted future cash flows, the Company recognizes an impairment loss to the extent the carrying amount exceeds the estimated fair value of the long-lived asset. Based on periodic tests of recoverability of long-lived assets, the Company did not record any impairment losses for the three and nine months ended September 30, 2013 and 2012.

The Company assesses its portfolio of land held for both development and investment for impairment if the intent of the Company changes with respect to either the development of, or the expected holding period for, the land.  The Company did not recognize any impairment charges on its investment in land for the three and nine months ended September 30, 2013 and 2012.

The Company also evaluates its unconsolidated investments for impairment, considering both the carrying value of the investment, estimated as the expected proceeds that it would receive if the entity were dissolved and the net assets were liquidated at their current GAAP basis, as well as the Company’s proportionate share of any impairment of assets held by unconsolidated investments. There were no impairment losses recognized by any of the Company’s investments in unconsolidated entities during the three and nine months ended September 30, 2013 and 2012.