13 STOCK BENEFIT PLAN

Description of Stock Benefit Plans

The Company has established stock benefit plans for the purpose of attracting and retaining the services of individuals who are important to the future success of the Company, including key employees, non-employee Directors and other key persons, and to provide them with increased motivation and incentive to exert their best efforts to enhance the long term value of the Company by enlarging their personal stake in its success.

On May 3, 2011, the stockholders of the Company approved the 2011 Stock Benefit Plan (the “2011 Plan”). The types of awards that may be granted under the 2011 Plan include stock options, stock appreciation rights, restricted stock, restricted stock units, unrestricted stock, and dividend equivalent rights. The 2011 Plan includes an authorization to issue up to 3,000,000 newly authorized shares of the Company’s common stock plus the number of shares available for grant under the 2008 Stock Benefit Plan, which were 521,577 as of December 31, 2012. The grant of a stock option or stock appreciation right is deemed, for purposes of determining the number of shares available under the 2011 Plan, as an award of one share of common stock for each share of common stock subject to the option or stock appreciation right. The grant of any full value awards (awards other than stock options or stock appreciation rights) is deemed, for purposes of determining the number of shares available under the 2011 Plan, as an award of 4.28 shares of common stock for each share of common stock subject to the award. Any forfeitures or cancellations of awards will be returned to the reserved pool under the 2011 Plan in the same manner. As of December 31, 2012, awards of 3,686 shares which have been forfeited or cancelled have been returned to the 2011 Plan and are available for future grants. The 2011 Plan succeeds previous plans as described below.

In November 2011, the Company’s Board of Directors approved a multiyear performance-based equity plan (“the 2012 Performance Plan”). The 2012 Performance Plan is governed by the 2011 Plan. Awards are in the form of restricted stock units with a service condition and market conditions.

The Company’s 1994 Stock Benefit Plan (the “1994 Plan”) was adopted by the Company at the time of its initial public offering. On February 1, 2000, the Company adopted the 2000 Stock Benefit Plan, which was subsequently amended (the “2000 Plan”). On May 6, 2003, the Company adopted the 2003 Stock Benefit Plan and on May 6, 2005, the shareholders approved the Amended and Restated 2003 Stock Benefit Plan (the “2003 Plan”). On May 1, 2008, the Company adopted the 2008 Stock Benefit Plan (the “2008 Plan”). Participants in each of the above referenced plans (the “Previous Plans”) included officers, non-employee Directors, and key employees of the Company. The Previous Plans allowed for the award of options, stock appreciation rights and restricted stock; though, no stock appreciation rights were awarded. No additional awards will be issued under the Previous Plans.

The 2008 Plan limited the number of shares issuable under the plan to 2,450,000. Stock options awarded reduced the number of shares available for awards by one share for every one share granted. Awards of restricted stock reduced the number of shares available for award by one share for every one share awarded, up to 250,000; beyond that, restricted stock reduced the number of shares available for award by 3.5 shares for every one share awarded. During 2009 and 2010, the number of options and shares of restricted stock issued to each non-employee Director were subject to a 2008 Plan provision that they not exceed 6,000 options and 2,000 shares.

Stock options, restricted stock and restricted stock unit awards granted to employees and non-employee Directors under the all stock benefit plans are as follows:

	Employee Awards				Non-Employee Director Awards
Name of Plan	Stock Options Granted	Restricted Stock Granted	Restricted Stock Units Granted(a)	Total Granted	Stock Options Granted	Restricted Stock Granted	Total Granted	Available for Future Grant of Awards
1994 Plan	1,542,381	—	—	1,542,381	153,654	—	153,654	—
2000 Plan	2,101,220	350,702	—	2,451,922	163,760	2,700	166,460	—
2003 Plan	2,737,142	96,822	—	2,833,964	217,723	28,935	246,658	—
2008 Plan	1,354,837	290,131	—	1,644,968	134,146	36,313	170,459	—
2011 Plan	386,609	195,978	114,743	697,330	—	21,003	21,003	1,730,963

(a) Represents service-based awards of 19,119 and market-based awards of 95,624 at the maximum achievable level.

Terms and provisions applicable to an award granted, including vesting provisions, are specified in an award certificate. Options granted under the 2011 Plan and the 2008 Plan during the years 2012, 2011 and 2010, vest 20% for each year of service until 100% vested on the fifth anniversary and expire after ten years from the date of grant. The exercise price per share for stock options issued under all of the stock benefit plans may not be less than 100% of the closing price of a share of common stock on the date the stock option is granted. Restricted stock awards granted to Directors vest 100% on the fifth anniversary of the date of grant. All of the 108,065, 87,913 and 108,252 restricted stock awards granted to employees during 2012, 2011 and 2010 vest 25% on each anniversary of the date of grant for a period of four years. Vesting conditions for restricted stock unit awards is more fully described under the heading “Restricted Stock Units” below. The Company has a policy of issuing new shares upon the exercise of stock options and upon the vesting of restricted stock.

Stock Options

Stock-based compensation cost for stock options is estimated at the grant date based on each option’s fair value as calculated using the Black-Scholes option pricing model, which incorporates various assumptions including expected dividend yields, volatility, option lives and interest rates. The Company recognizes stock-based compensation cost as expense ratably on a straight-line basis over the requisite service period. In determining the service period, the Company considers service requirements, the vesting period and retirement eligibility of the grantee. Authoritative guidance requires the estimation of forfeitures when recognizing compensation expense and that this estimate of forfeitures be adjusted over the requisite service period should actual forfeitures differ from such estimates. Changes in estimated forfeitures are recognized through a cumulative catch-up adjustment, which is recognized in the period of change, and impacts the amount of unamortized compensation expense to be recognized in future periods.

The following weighted average assumptions were used for the years ended December 31, 2012, 2011 and 2010:

Assumption	2012		2011		2010
Expected dividend yield	4.22	%	4.32	%	5.87	%
Expected volatility	26.53	%	25.98	%	19.31	%
Expected lives of the employee options	6.0 Years		6.0 Years		5.7 Years
Expected lives of the Director options	—		—		6.7 Years
Risk free interest rate	1.03	%	2.36	%	2.75	%

The expected dividend yield was based on the historical dividend growth rates and the historical annual dividends. The expected volatility was based on the historical volatility of the Company’s common stock. The weighted average expected option lives, for both employee and Director options, with a lifetime of ten years, was based on the Company’s historical data for prior period stock option exercise and cancellation activity. The risk free interest rates for the expected life of the options were based on the implied U.S. Treasury yield curve.

A summary of stock option activity for the year ended December 31, 2012 is as follows:

	Number of Options		Weighted Average Exercise Price Per Option		Weighted Average Remaining Contractual Term in Years	Aggregate Intrinsic Value
Options outstanding at December 31, 2011	2,774,372		$	46.14
Granted	219,799		63.69
Exercised	(436,430	)	41.77
Cancelled	(1,400	)	37.07
Options outstanding at December 31, 2012	2,556,341		$	48.40	5.4	$	33,002
Options exercisable at December 31, 2012	1,721,270		$	47.04	4.4	$	24,563

A summary of unvested stock option activity for the year ended December 31, 2012 is as follows:

	Number of Options		Weighted Average Exercise Price Per Option
Unvested stock options at December 31, 2011	1,078,921		$	47.48
Granted	219,799		63.69
Vested	(462,249	)	48.51
Cancelled	(1,400	)	37.07
Unvested stock options at December 31, 2012	835,071		$	51.20

As of December 31, 2012, there was $1,483 of total unrecognized compensation cost related to unvested stock options that is expected to be recognized over a weighted average period of 1.63 years.

A summary of stock option activity for the years ended December 31, 2012, 2011 and 2010 is as follows:

	2012		2011		2010
Stock-based compensation costs recognized	$	3,052	$	2,813	$	2,818
Fair value of options vested	2,717		2,562		2,457
Cash received from the exercise of options	18,228		23,843		14,090
Intrinsic value of options exercised	8,737		9,288		5,723
Grant date fair value of options granted to employees, per share	9.32		9.95		4.14
Grant date fair value of options granted to Directors, per share	—		—		4.33

Number of options granted to employees	219,799		166,810		352,454
Number of options granted to Directors	—		—		48,490

Restricted Stock

Stock-based compensation cost for restricted stock is measured based on the closing price of the Company’s common stock on the date of grant and is recognized ratably on a straight-line basis over the requisite service period. In determining the service period, the Company considers service requirements, the vesting period and retirement eligibility of the grantee.

A summary of restricted stock activity for the year ended December 31, 2012 is as follows:

	Number of Shares		Weighted Average Grant Date Fair Value Per Share
Restricted stock outstanding and unvested at December 31, 2011	289,448		$	50.29
Granted	119,604		63.62
Vested and issued	(107,546	)	50.39
Cancelled	(6,472	)	45.05
Restricted stock outstanding and unvested at December 31, 2012	295,034		$	55.77

As of December 31, 2012, there was $5,258 of total unrecognized compensation cost related to unvested restricted stock that is expected to be recognized over a weighted-average period of 2.14 years.

A summary of restricted stock activity for the years ended December 31, 2012, 2011 and 2010 is as follows:

	2012		2011		2010
Stock-based compensation costs recognized	$	7,659	$	6,226	$	4,527
Fair value of restricted shares vested	6,707		5,246		3,447
Weighted average price of shares granted, per share	63.62		62.09		49.35

Number of restricted shares granted to employees	108,065		87,913		108,252
Number of restricted shares granted to Directors	11,539		9,464		12,760

Restricted Stock Units

On February 14, 2012, awards in connection with the 2012 Performance Plan, with an estimated fair value of $4,084, were granted to executive officers of the Company. Awards are in the form of restricted stock units with a service condition and market conditions, with dividend equivalent rights. Seventy-five percent of the total award value is market-based and subject to three Total Shareholder Return (“TSR”) market measures: 50% absolute Home Properties TSR, 25% relative NAREIT All Equity REIT Index, and 25% relative NAREIT Apartment Index. The remaining twenty-five percent is service-based and vests over three years. The measurement period for the 2012 Performance Plan began on January 1, 2012 and will end on December 31, 2014.

At the end of the three-year measurement period ending December 31, 2014, the Company’s TSR results will be compared to the Threshold, Target and High hurdles established at the beginning of the three-year measurement period as defined below:

	2012 — 2014 Performance Goals
Market Requirements	Threshold	Target	High

Absolute TSR	7%	9%	11%

All REIT TSR Index	Absolute TSR is within 350 basis points below the index return	Absolute TSR is within 100 basis points below or above the index return	Absolute TSR is greater than 250 basis points above the index return

Apartment TSR Index	Absolute TSR is within 350 basis points below the index return	Absolute TSR is within 100 basis points below or above the index return	Absolute TSR is greater than 250 basis points above the index return

If the Company’s TSR results meet or exceed the Threshold hurdle for any of the three performance measures, an equity award will be granted in accordance with the vesting conditions as outlined in the 2012 Performance Plan. Actual results achieved that fall between the Threshold and High hurdles will result in a prorated number of awards granted.

The fair value of the restricted stock unit awards was estimated on the date of grant using a multifactor Monte Carlo simulation model, which incorporates various assumptions including the baseline share value, dividend yield, estimated volatility figures and risk free rates over the three-year measurement period. The Company recognizes compensation expense for the 2012 Performance Plan over the three-year measurement period for 100% of each award with a service condition and 50% of each award with a market condition. For the remaining 50% of each award with a market condition, the Company recognizes compensation expense over a four year period which includes the three-year measurement period and a one-year vesting period subsequent to the end of the measurement period. The recognition of compensation cost takes into account retirement eligibility.

The following weighted average assumptions were used for grants awarded during the year ended December 31, 2012:

Assumption	2012
Baseline share value	$	55.87
Expected dividend yield	4.45		%
Expected volatility	31.24		%
Risk free interest rate	0.22		%
Estimated fair value per share of the market-based awards	$	51.40
Estimated fair value per share of the service-based awards	$	59.32

A summary of unvested restricted stock unit activity for the year ended December 31, 2012 is as follows:

	Number of Awards		Weighted Average Grant Date Fair Value Per Share
Restricted stock units unvested at December 31, 2011	—		$	—
Granted (a)	114,743		53.39
Vested and issued (b)	(6,490	)	53.39
Forfeited	(3,245	)	53.39
Restricted stock units unvested at December 31, 2012	105,008		$	53.39

(a) Represents service-based awards of 19,119 and market-based awards of 95,624 at the maximum achievable level.

(b) Awards were issued in connection with the departure of an executive officer of the Company and were calculated in accordance with the 2012 Performance Plan.

During the year ended December 31, 2012, the Company recognized stock-based compensation expense of $3,240 for the 2012 Performance Plan. As of December 31, 2012, there was $844 of total unrecognized compensation cost related to unvested restricted stock units that is expected to be recognized over a weighted-average period of 1.7 years.