Investments in Real Estate Entities

Investment in Unconsolidated Real Estate Entities

As of March 31, 2016, the Company had investments in five unconsolidated real estate entities with ownership interest percentages ranging from 20.0% to 31.3%, excluding development joint ventures. 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 March 31, 2016, AvalonBay Value Added Fund II, L.P. ("Fund II") sold Eaves Rancho San Diego, located in El Cajon, CA, containing 676 apartment homes for $158,000,000. The Company's share of the gain in accordance with GAAP for the disposition was $13,057,000. In conjunction with the disposition of this community during the three months ended March 31, 2016, Fund II repaid $68,091,000 of related secured indebtedness in advance of the scheduled maturity date. This resulted in a charge for a prepayment penalty and write-off of deferred financing costs, of which the Company's portion was $1,207,000, which was reported as a reduction of equity in income of unconsolidated real estate entities on the accompanying Condensed Consolidated Statements of Comprehensive Income.

During the three months ended March 31, 2016, Archstone Multifamily Partners AC LP (the "U.S. Fund") sold two communities:


•	Archstone Boca Town Center, located in Boca Raton, FL, containing 252 apartment homes for $56,300,000. The Company's share of the gain in accordance with GAAP for the disposition was $4,120,000.


•	Avalon Kips Bay, located in New York, NY, containing 209 apartments homes for $173,000,000. The Company's share of the gain in accordance with GAAP for the disposition was $12,448,000.

In conjunction with the disposition of these communities, during the three months ended March 31, 2016, the U.S. Fund repaid an aggregate of $94,822,000 of related secured indebtedness in advance of the scheduled maturity dates. This resulted in charges for prepayment penalties and write-offs of deferred financing costs, of which the Company's aggregate portion was $2,003,000, which was reported as a reduction of equity in income of unconsolidated real estate entities on the accompanying Condensed Consolidated Statements of Comprehensive Income.

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 joint ventures formed with Equity Residential as part of the Archstone acquisition (dollars in thousands):



	3/31/2016		12/31/2015
	(unaudited)		(unaudited)
Assets:
Real estate, net	$	1,111,906	$	1,392,833
Other assets	59,975		57,044
Total assets	$	1,171,881	$	1,449,877

Liabilities and partners’ capital:
Mortgage notes payable and credit facility	$	782,988	$	947,205
Other liabilities	21,250		20,471
Partners’ capital	367,643		482,201
Total liabilities and partners’ capital	$	1,171,881	$	1,449,877

The following is a combined summary of the operating results of the entities accounted for using the equity method for the periods presented, excluding amounts associated with joint ventures formed with Equity Residential as part of the Archstone acquisition (dollars in thousands):



	For the three months ended
	3/31/2016			3/31/2015
	(unaudited)
Rental and other income	$	36,955		$	45,255
Operating and other expenses	(14,170		)	(17,337		)
Gain on sale of communities	103,321			32,490
Interest expense, net (1)	(20,001		)	(10,477		)
Depreciation expense	(9,240		)	(11,902		)
Net income	$	96,865		$	38,029

_____________________________________


(1)	Amount for 2016 includes charges for prepayment penalties and write-offs of deferred financing costs of $10,864.

In conjunction with the formation of Fund II, and the acquisition of the U.S. Fund, Multifamily Partners AC JV LP (the "AC JV") and Brandywine Apartments of Maryland, LLC ("Brandywine"), the Company incurred costs in excess of its equity in the underlying net assets of the respective investments. These costs represent $39,871,000 and $40,978,000 at March 31, 2016 and December 31, 2015, respectively, of the respective investment balances. These amounts are being amortized over the lives of the underlying assets as a component of equity in income of unconsolidated entities on the accompanying Condensed Consolidated Statements of Comprehensive Income.

Investments in Consolidated Real Estate Entities

During the three months ended March 31, 2016, the Company acquired two communities:


•	Avalon Hoboken, located in Hoboken, NJ. Avalon Hoboken contains 217apartment homes and was acquired for a purchase price of $129,700,000. In conjunction with the acquisition, the Company assumed a fixed rate secured mortgage note with a principal balance of $67,904,000 and a contractual interest rate of 4.18% maturing in December 2020.


•	Avalon Potomac Yard, located in Alexandria, VA. Avalon Potomac Yard contains 323 apartment homes and was acquired for a purchase price of $108,250,000.

The Company accounted for these acquisitions as business combinations and recorded the acquired assets and assumed liabilities, including identifiable intangibles, at their fair values. The Company used third party pricing or internal models for the values of the land, a valuation model for the values of the buildings and debt, and an internal model to determine the fair values of the remaining real estate assets and in-place leases. Given the heterogeneous nature of multifamily real estate, the fair values for the land, debt, 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.

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 acquisition and disposition activity did not occur, in the amounts of $1,846,000 and $1,187,000 for the three months ended March 31, 2016 and 2015, respectively. These costs are included in expensed acquisition, development, and other pursuit costs, net of recoveries 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 property or long-lived asset may not be recoverable, the Company assesses its recoverability by comparing the carrying amount of the property or 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 property or long-lived asset. Based on periodic tests of recoverability of long-lived assets for the three months ended March 31, 2016 and 2015, the Company did not recognize any impairment losses for wholly-owned operating real estate assets.

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. During the three months ended March 31, 2016, the Company recognized an aggregate impairment charge of $6,500,000 relating to two undeveloped land parcels which the Company now intends to sell. This charge is included in casualty and impairment (gain) loss, net on the accompanying Condensed Consolidated Statements of Comprehensive Income. The Company did not recognize any material impairment charges on its investment in land during the three months ended March 31, 2015.

The Company evaluates its unconsolidated investments for other than temporary impairment, considering both the extent and amount by which the carrying value of the investment exceeds the fair value, and the Company’s intent and ability to hold the investment to recover its carrying value. The Company also evaluates its proportionate share of any impairment of assets held by unconsolidated investments. There were no material other than temporary impairment losses recognized by any of the Company’s investments in unconsolidated real estate entities during the three months ended March 31, 2016 and 2015.

Casualty Gains and Losses

During the three months ended March 31, 2016, the Company reached a final insurance settlement for the property damage and lost income for the Edgewater casualty loss. In 2015 and 2016, the Company received aggregate insurance proceeds for Edgewater of $73,008,000, after self-insurance and deductibles. During the three months ended March 31, 2016, the Company received the final $29,008,000 of these proceeds, of which $8,702,000 was recognized as casualty and impairment (gain) loss, net on the accompanying Condensed Consolidated Statements of Comprehensive Income, and $20,306,000 as business interruption insurance proceeds, which is recorded as a component of rental and other income on the Condensed Consolidated Statements of Comprehensive Income.

During the three months ended March 31, 2015, the Company recorded a casualty charge of $21,844,000 to write-off the net book value of the building destroyed in the Edgewater fire. The write-off, coupled with additional incident response expenses, was partially offset by $22,142,000 in insurance proceeds received during the three months ended March 31, 2015, included in prepaid expenses and other assets on the accompanying Condensed Consolidated Balance Sheets. The net impact to casualty loss of $793,000 is included in casualty and impairment (gain) loss, net on the accompanying Condensed Consolidated Statements of Comprehensive Income. See discussion in Note 1, "Organization, Basis of Presentation and Significant Accounting Policies, Legal and Other Contingencies," and Part II, Item 1, "Legal Proceedings," for further discussion of the Edgewater casualty loss.

During the three months ended March 31, 2015, several of the Company's communities in its Northeast markets incurred property and casualty damages from severe winter storms experienced during this time. The Company recorded an impairment due to a casualty loss of $4,195,000 to recognize the damages from the storms as casualty and impairment (gain) loss, net on the accompanying Condensed Consolidated Statements of Comprehensive Income.