Investments in Real Estate Entities

Investments in Unconsolidated Real Estate Entities

The Company accounts for its investments in unconsolidated real estate entities under the equity method of accounting, except as otherwise noted below, as discussed in Note 1, "Organization and Basis of Presentation," under Principles of Consolidation. The significant accounting policies of the Company's unconsolidated real estate entities are consistent with those of the Company in all material respects.

As of December 31, 2014, the Company had investments in the following real estate entities:

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AvalonBay Value Added Fund, LP ("Fund I")—In March 2005, the Company formed Fund I, a private, discretionary real estate investment vehicle, which acquired and operated communities in the Company's markets. Fund I served as the principal vehicle through which the Company acquired investments in apartment communities, subject to certain exceptions, until March 2008. Fund I has a term that expires in March 2015, after having exercised two one-year extension options. During 2014, Fund I sold its final four apartment communities. Fund I has nine institutional investors, including the Company. A significant portion of the investments made in Fund I by its investors were made through AvalonBay Value Added Fund, Inc., a Maryland corporation that qualifies as a REIT under the Code (the "Fund I REIT"). A wholly-owned subsidiary of the Company is the general partner of Fund I, has a 15.2% combined general partner and limited partner equity interest, and has fully recovered its basis as of December 31, 2014, with any additional liquidation proceeds to be recognized in earnings as received. During the period which Fund I was invested in apartment communities, the Company received asset management fees, property management fees and redevelopment fees.

During 2014, Fund I sold its final four communities:


•	Weymouth Place, located in Weymouth, MA, for $25,750,000;


•	South Hills Apartments, located in West Covina, CA, for $21,800,000;


•	The Springs, located in Corona, CA, for $43,200,000; and


•	Avalon Rutherford Station, located in East Rutherford, NJ, for $34,250,000.

The Company's proportionate share of the gain in accordance with GAAP recognized on the sale of these four communities was $3,317,000.

The net assets and results of operations of The Springs were consolidated for financial reporting purposes. As a result, 100% of the gain recognized of $16,656,000 is included in gain on sale of communities in the Consolidated Statements of Comprehensive Income, and the Company's joint venture partners' 84.8% interest in this gain of $14,132,000 is reported as a component of net (income) loss attributable to noncontrolling interests. Concurrent with the disposition of The Springs, Fund I repaid its obligation to the Company under a fixed rate secured mortgage loan in the amount of $21,748,000 with an interest rate of 6.06% in advance of its October 2014 maturity date. Upon repayment the Company deconsolidated the net assets of The Springs.

In conjunction with the disposition of these communities, Fund I repaid $43,771,000 of related secured indebtedness in advance of the scheduled maturity dates. This resulted in a charge for a prepayment penalty, of which the Company’s portion was $328,000 and was reported as a reduction of equity in income (loss) of unconsolidated real estate entities on the accompanying Consolidated Statements of Comprehensive Income.

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AvalonBay Value Added Fund II, LP ("Fund II")—In September 2008, the Company formed Fund II, a private, discretionary real estate investment vehicle which acquired and operates communities in the Company's markets. Fund II served as the exclusive vehicle through which the Company acquired investment interests in apartment communities, subject to certain exceptions, through the close of its investment period in August 2011. Fund II has six institutional investors, including the Company. One of the Company's wholly owned subsidiaries is the general partner of Fund II and at December 31, 2014, excluding costs incurred in excess of equity in the underlying net assets of Fund II, the Company has an equity investment of $92,162,000 (net of distributions), representing a 31.3% combined general partner and limited partner equity interest.

During 2014, Fund II sold two communities:


•	Avalon Fair Oaks, located in Fairfax, VA, for $108,200,000 and


•	Avalon Bellevue Park, located in Bellevue, WA, for $58,750,000.

The Company's proportionate share of the gain in accordance with GAAP for the two dispositions was $21,624,000.

In conjunction with the disposition of these communities, Fund II repaid $63,407,000 of related secured indebtedness in advance of the scheduled maturity dates. This resulted in charges for prepayment penalties, of which the Company’s portion was $1,364,000 and was reported as a reduction of equity in income (loss) of unconsolidated real estate entities on the accompanying Consolidated Statements of Comprehensive Income. In addition, during 2014, Fund II repaid an outstanding mortgage note at par in the amount of $42,023,000.

Subsidiaries of Fund II have 10 loans secured by individual assets with aggregate amounts outstanding of $358,811,000, with maturity dates that vary from January 2016 to September 2019. The mortgage loans are payable by the subsidiaries of Fund II from operating cash flow or disposition proceeds from the underlying real estate. The Company has not guaranteed repayment of this debt, nor does the Company have any obligation to fund this debt should Fund II be unable to do so.

In addition, as part of the formation of Fund II, the Company provided to one of the limited partners a guarantee. The guarantee provides that if, upon final liquidation of Fund II, the total amount of all distributions to that partner during the life of Fund II (whether from operating cash flow or property sales) does not equal a minimum of the total capital contributions made by that partner, then the Company will pay the partner an amount equal to the shortfall, but in no event more than 10% of the total capital contributions made by the partner (maximum of approximately $8,910,000 as of December 31, 2014). Under the expected Fund II liquidation scenario, as of December 31, 2014 the expected realizable value of the real estate assets owned by Fund II is considered adequate to avoid payment under such guarantee to that partner. The estimated fair value of, and the Company's obligation under, this guarantee, both at inception and as of December 31, 2014, was not significant and therefore the Company has not recorded any obligation for this guarantee as of December 31, 2014.

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Archstone Multifamily Partners AC LP (the "U.S. Fund")—The U.S. Fund was formed in July 2011 and is fully invested. The U.S. Fund has a term that expires in July 2023, assuming the exercise of two, one-year extension options. The U.S. Fund has six institutional investors, including the Company. The Company is the general partner of the U.S. Fund and, at December 31, 2014 excluding costs incurred in excess of equity in the underlying net assets of the U.S. Fund, the Company has an equity investment of $88,220,000 (net of distributions), representing a 28.6% combined general partner and limited partner equity interest. The Company acquired its interest in the U.S. Fund as part of the Archstone Acquisition.

Subsidiaries of the U.S. Fund have nine loans secured by individual assets with amounts outstanding in the aggregate of $327,880,000 with varying maturity dates, ranging from January 2019 to November 2022. The mortgage loans are payable by the subsidiaries of the U.S. Fund with operating cash flow or disposition proceeds from the underlying real estate. The Company has not guaranteed the debt of the U.S. Fund, nor does the Company have any obligation to fund this debt should the U.S. Fund be unable to do so.

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Multifamily Partners AC JV LP (the "AC JV")—The AC JV is a joint venture that was formed in 2011 and has four institutional investors, including the Company. Excluding costs incurred in excess of equity in the underlying net assets of the AC JV, at December 31, 2014 the Company has an equity investment of $69,633,000 (net of distributions), representing a 20.0% equity interest. The Company acquired its interest in the AC JV as part of the Archstone Acquisition.

The AC JV partnership agreement contains provisions that require the Company 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. During the year ended December 31, 2013, the Company provided the AC JV with the opportunity to acquire a parcel of land owned by the Company as required in the right of first offer provisions for the joint venture. The AC JV exercised its right to acquire the land parcel for development and during the year ended December 31, 2014, completed construction of an additional apartment community located in Cambridge, MA, containing 103 apartment homes. The Company sold the parcel of land to the AC JV in exchange for a cash payment and a capital account credit, and it supervised the development in exchange for a developer fee. The Company owns one additional land parcel for the development of 301 apartment homes, classified as a Development Right in Cambridge, MA, acquired as part of the Archstone Acquisition, that is subject to ROFO restrictions. The ROFO restriction expires in 2019.

As of December 31, 2014, subsidiaries of the AC JV have eight unsecured loans outstanding in the aggregate of $162,300,000 which mature in August 2021, and which were made by the investors in the venture, including the Company, in proportion to the investors' respective equity ownership interest. The unsecured loans are payable by the subsidiaries of the AC JV with operating cash flow from the venture. The Company has not guaranteed the debt of the AC JV, nor does the Company have any obligation to fund this debt should the AC JV be unable to do so.

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CVP I, LLC—In February 2004, the Company entered into a joint venture agreement with an unrelated third-party for the development of Avalon Chrystie Place, a 361 apartment home community located in New York, New York, for which construction was completed in 2005. The Company holds a 20.0% equity interest in the venture (with a right to 50.0% of distributions after achievement of a threshold return, which was achieved in 2013 and 2014). The Company is the managing member of CVP I, LLC, however, property management services at the community were performed by an unrelated third party.

During the year ended December 31, 2014, CVP I, LLC sold Avalon Chrystie Place for $365,000,000. The Company's share of the gain in accordance with GAAP for the disposition was $50,478,000. In addition, the Company earned $58,128,000 for its promoted interest in CVP I, LLC, reported in equity in income (loss) of unconsolidated real estate entities on the accompanying Consolidated Statements of Comprehensive Income.

In conjunction with the disposition of Chrystie Place, CVP I, LLC repaid $117,000,000 of related secured indebtedness in advance of the scheduled maturity date. This resulted in a charge for a prepayment penalty and a write off of deferred financing costs, of which the Company’s portion was $647,000 and was reported as a reduction of equity in income (loss) of unconsolidated real estate entities on the accompanying Consolidated Statements of Comprehensive Income.

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MVP I, LLC—In December 2004, the Company entered into a joint venture agreement with an unrelated third-party for the development of Avalon at Mission Bay North II. Construction of Avalon at Mission Bay North II, a 313 apartment-home community located in San Francisco, California, was completed in December 2006. The Company holds a 25.0% equity interest in the venture (with a right to 45.0% of distributions after achievement of a threshold return, which was achieved in 2014 and 2013). See Note 14, "Subsequent Events," for further discussion of the Company's promoted interest. The Company is responsible for the day-to-day operations of the community and is the management agent subject to the terms of a management agreement. In December 2007, MVP I, LLC executed a fixed rate conventional loan which is secured by the underlying real estate assets of the community, for $105,000,000. In December 2014, the loan converted to a variable rate, interest-only loan through the final maturity in December 2015, bearing interest at LIBOR plus 2.50%. The Company has not guaranteed the debt of MVP I, LLC, nor does the Company have any obligation to fund this debt should MVP I, LLC be unable to do so.

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Brandywine Apartments of Maryland, LLC ("Brandywine")—Brandywine owns a 305 apartment home community located in Washington, DC. The community is managed by a third party. Brandywine is comprised of five members who hold various interests in the joint venture. In conjunction with the Archstone Acquisition, the Company acquired a 26.1% equity interest in the venture, and subsequently purchased an additional 2.6% interest, and as of December 31, 2014, holds a 28.7% equity interest in the venture.

Brandywine has an outstanding $24,346,000 fixed rate mortgage loan that is payable by the venture. The Company has not guaranteed the debt of Brandywine, nor does the Company have any obligation to fund this debt should Brandywine be unable to do so.

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Arna Valley View LP—In connection with the municipal approval process to develop a consolidated community, the Company entered into a limited partnership in February 1999 to develop, finance, own and operate Arna Valley View, a 101 apartment-home community in Arlington, Virginia. During the year ended December 31, 2014, the limited partnership that owned Arna Valley View sold the apartment community. In conjunction with the sale of Arna Valley View, the Company received amounts due for its residual ownership interest of approximately $2,406,000, reported as a component of equity in income (loss) of unconsolidated entities on its Consolidated Statements of Comprehensive Income. In conjunction with the disposition of the community, the venture repaid $8,934,000 of related secured indebtedness in advance of the scheduled maturity date.

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Residual JV—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 plan to divest (to third parties or to the Company or Equity Residential) over time (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 currently include a 20.0% interest in Lake Mendota Investments, LLC and Subsidiaries ("SWIB"), a joint venture which currently owns and manages four apartment communities with 1,410 apartment homes in the United States, which is secured by outstanding borrowings in the amount of $148,866,000 with varying maturity dates, ranging from December 2015 to December 2029; two land parcels; and 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 Lehman 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 assets and liabilities of the Residual JV. The Company has not guaranteed the debt of SWIB, nor does the Company have any obligation to fund this debt should SWIB be unable to do so.

During 2014, SWIB sold two communities containing 492 apartment homes, for an aggregate sales price of $76,250,000. The Company's proportionate share of the gain in accordance with GAAP for the two dispositions was $779,000. In conjunction with the disposition of these communities, SWIB repaid $38,155,000 of related indebtedness on its credit facility in advance of the scheduled maturity dates.

As of December 31, 2014, the Residual JV completed the disposition of substantially all of its direct and indirect interests in German multifamily real estate assets and the associated property management company. The Company’s proportionate share of income from the Residual JV (including from gains from dispositions) from its interests in German multifamily real estate assets, which were owned through a TRS, was $8,510,000 for the year ended December 31, 2014, recorded as a component of equity in income (loss) of unconsolidated real estate entities in the Consolidated Statements of Comprehensive Income. The Company incurred income taxes related to these dispositions. The Company received proceeds of $53,052,000 during the year ended December 31, 2014 from the Residual JV, for its proportionate share of the proceeds from operations and the dispositions of the venture's interest in German multifamily real estate assets.

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



	12/31/14		12/31/13
Assets:
Real estate, net	$	1,617,627	$	1,905,005
Other assets	72,290		164,183
Total assets	$	1,689,917	$	2,069,188
Liabilities and partners' capital:
Mortgage notes payable and credit facility	$	980,128	$	1,251,067
Other liabilities	24,884		32,257
Partners' capital	684,905		785,864
Total liabilities and partners' capital	$	1,689,917	$	2,069,188

The following is a combined summary of the operating results of the entities accounted for using the equity method, for the years presented, excluding amounts associated with the Residual JV (dollars in thousands):



	For the year ended
	12/31/14			12/31/13			12/31/12
Rental and other income	$	198,939		$	212,994		$	172,076
Operating and other expenses	(80,301		)	(86,434		)	(73,955		)
Gain on sale of real estate (1)	333,221			96,152			106,195
Interest expense, net	(61,458		)	(61,404		)	(53,904		)
Depreciation expense	(52,116		)	(61,002		)	(47,748		)
Net income	$	338,285		$	100,306		$	102,664

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(1)	Amount for the year ended December 31, 2012 includes $44,700 of gain recognized by the joint venture associated with the Company's acquisition of Avalon Del Rey from its joint venture partner.

In conjunction with the formation of Fund I and Fund II, the Company incurred costs in excess of its equity in the underlying net assets of the respective investments. These costs represent $3,880,000 at December 31, 2014 and $5,439,000 at December 31, 2013 of the respective investment balances.

The following is a summary of the Company's equity in income (loss) of unconsolidated entities for the years presented (dollars in thousands):



	For the year ended
	12/31/14		12/31/13			12/31/12
Fund I (1)	$	475	$	10,924		$	7,041
Fund II (2)	24,808		6,206			2,130
U.S. Fund (3)	342		(661		)	—
AC JV (3)	1,579		2,569			—
CVP I, LLC (4)	113,127		5,783			5,394
MVP I, LLC (5)	1,651		1,137			493
Brandywine (3)	828		661			—
Arna Valley View LP (6)	2,406		—			—
Residual JV (3) (7)	3,547		(38,332		)	—
Avalon Del Rey, LLC (8)	—		181			4,000
Juanita Village (6)	3		378			1,856
Total	$	148,766	$	(11,154	)	$	20,914

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(1)	Equity in income for the years ended December 31, 2014, 2013 and 2012 includes the Company's proportionate share of the gain on the sale of Fund I assets of $944, $11,484 and $7,971, respectively.


(2)	Equity in income for the years ended December 31, 2014 and 2013 includes the Company's proportionate share of the gain on the sale of Fund II assets of $21,624 and $2,790, respectively.


(3)	The Company's joint venture partner's interest was acquired in conjunction with the Archstone Acquisition.


(4)	Equity in income for the years ended December 31, 2014, 2013 and 2012 includes $61,218, $5,527 and $5,260, respectively, relating to the Company's recognition of its promoted interest. Amount for 2014 also includes $50,478 related to the disposition of Avalon Chrystie Place.


(5)	Equity in income for the years ended December 31, 2014 and 2013 includes $930 and $516 relating to the Company's recognition of its promoted interest.


(6)	The Company's equity in income for this entity represents its residual profits from the sale of the community.


(7)	Equity in income from this entity for 2013 includes certain expensed Archstone Acquisition costs borne by the venture.


(8)	During 2012, the Company purchased its joint venture partner's interest in this venture.

Investments in Consolidated Real Estate Entities

In December 2014, the Company acquired Avalon Mission Oaks, located in Camarillo, CA. Avalon Mission Oaks contains 160 apartment homes and was acquired for a purchase price of $47,000,000. The Company accounted for this acquisition as a business combination and recorded the acquired assets and assumed liabilities, including identifiable intangibles, at their fair values. The Company looked to third party pricing or internal models for the values of the land, and an internal model to determine the fair values of the real estate assets and in-place leases. Given the heterogeneous nature of multifamily real estate, the fair values for the land, real estate assets and in-place leases incorporated significant unobservable inputs and therefore are considered to be Level 3 prices within the fair value hierarchy.

The Company expenses transaction costs associated with acquisition activity as they are incurred. To the extent the Company receives amounts related to acquired communities for periods prior to their acquisition, the Company reports these receipts, net with expensed acquisition costs. In 2014, the Company received amounts related to communities acquired in the Archstone Acquisition, for periods prior to the Company’s ownership, in excess of acquisition costs incurred, resulting in a net recovery of $7,681,000. These amounts are primarily comprised of property tax and mortgage insurance refunds. Expensed transaction costs associated with the acquisitions made by the Company in 2013 and 2012, including those for the Archstone Acquisition, totaled $44,052,000 and $9,593,000, respectively. These amounts are reported as a component of expensed acquisition, development and other pursuit costs on the accompanying Consolidated Statements of Comprehensive Income.

During the year ended December 31, 2014, the Company entered into a joint venture to acquire a land parcel and construct a mixed use building that will contain rental apartments, for-sale residential condominium units and related common elements. The Company will own a 70% interest in the venture and have all of the rights and obligations associated with the rental apartments, and the venture partner will own the remaining 30% interest and have all of the rights and obligations associated with the for-sale condominium units. The Company will share responsibility for the development and oversee construction of the structure. Upon formation of the venture, the Company and its venture partner made capital contributions, with costs incurred subsequent to the initial contributions to be funded through a loan provided by the Company. As of December 31, 2014, the Company's aggregate investment in the venture is $11,161,000 and is reported as a component of land held for development on the Consolidated Balance Sheets. The Company had provided funding for the venture partner’s share of costs in the amount of $5,354,000 reported as a component of prepaid expenses and other assets on the Consolidated Balance Sheets, recognizing interest income as earned as a component of interest expense, net on the Consolidated Statements of Comprehensive Income. The loan provided to the venture partner will be repaid with the proceeds received from the sale of the residential condominium units. The venture is considered a variable interest entity, and the Company will consolidate its interest in the rental apartments and common areas, and account for the for-sale component of the venture as an unconsolidated investment.