10. Stock-Based Compensation Plans

On May 21, 2009, the stockholders of the Company, upon the recommendation of the Board of Directors, approved the AvalonBay Communities, Inc. 2009 Stock Option and Incentive Plan (the “2009 Plan”). The 2009 Plan includes an authorization to issue up to 4,199,822 shares of the Company’s common stock, par value $0.01 per share, (2,930,000 newly authorized shares plus 1,269,822 shares that were available for grant as of May 21, 2009 under the Company’s 1994 Stock Option and Incentive Plan (the “1994 Plan”)), pursuant to awards under the 2009 Plan. In addition, any awards that were outstanding under the 1994 Plan on May 21, 2009 that are subsequently forfeited, canceled, surrendered or terminated (other than by exercise) will become available for awards under the 2009 Plan. The 2009 Plan provides for various types of equity awards to employees, officers, non-employee directors and other key personnel of the Company and its subsidiaries. The types of awards that may be granted under the 2009 Plan include restricted and deferred stock, stock options that qualify as incentive stock options (“ISOs”) under Section 422 of the Code, non-qualified stock options, and stock appreciation rights. The 2009 Plan will expire on May 21, 2019.

Information with respect to stock options granted under the 2009 and 1994 Plan is as follows:


				Weighted					Weighted
				average					average
	2009 Plan			exercise price		1994 Plan			exercise price
	shares			per share		shares			per share
Options Outstanding, December 31, 2008		—			N/A		2,623,135		$	83.49

Exercised		—			—		(115,675	)		44.20
Granted		—			—		344,801			48.60
Forfeited		—			—		(16,007	)		98.83

Options Outstanding, December 31, 2009		—			—		2,836,254		$	80.76

Exercised		—			—		(729,381	)		57.87
Granted		126,484			74.20		—			—
Forfeited		—			—		(34,656	)		100.02

Options Outstanding, December 31, 2010		126,484		$	74.20		2,072,217		$	88.50

Exercised		(23,908	)		75.75		(930,391	)		82.43
Granted		144,827			115.83		—			—
Forfeited		—			—		(28,867	)		68.29

Options Outstanding, December 31, 2011		247,403		$	98.42		1,112,959		$	94.10


Options Exercisable:

December 31, 2009		—			N/A		2,127,829		$	81.90


December 31, 2010		3,417		$	74.20		1,730,978		$	93.60


December 31, 2011		30,771		$	81.54		1,012,304		$	98.62

The following summarizes the exercise prices and contractual lives of options outstanding as of December 31, 2011:


2009 Plan Number of Options		Range - Exercise Price	Weighted Average Remaining Contractual Term (in years)
	103,468	$70.00 - 79.99		8.1
	143,935	110.00 - 119.99		9.1

	247,403


1994 Plan Number of Options		Range - Exercise Price	Weighted Average Remaining Contractual Term (in years)
	2,059	$30.00 - 39.99		1.1
	251,611	40.00 - 49.99		3.4
	124,569	60.00 - 69.99		3.1
	730	70.00 - 79.99		3.5
	160,777	80.00 - 89.99		5.4
	254,061	90.00 - 99.99		4.1
	1,546	100.00 - 109.99		4.6
	4,122	110.00 - 119.99		5.5
	313,484	140.00 - 149.99		5.1

	1,112,959

Options outstanding under the 2009 and 1994 Plans at December 31, 2011 had an intrinsic value of $7,962,000 and $40,623,000, respectively. Options exercisable under the 2009 and 1994 Plans at December 31, 2011 had an intrinsic value of $1,510,000 and $32,370,000, respectively. Options exercisable under the 2009 and 1994 Plans had a weighted average contractual life of 8.6 years and 4.1 years, respectively. The intrinsic value of options exercised during 2011, 2010 and 2009 was $ 46,126,000, $30,811,000 and $2,199,000 respectively.

The cost related to stock-based employee compensation for employee stock options included in the determination of net income is based on estimated forfeitures for the given year. Estimated forfeitures are adjusted to reflect actual forfeitures at the end of the vesting period. The following table summarizes the weighted average fair value of employee stock options for the periods shown and the associated assumptions used to calculate the value:


	2011			2010			2009

Weighted average fair value per share	$	29.40		$	19.45		$	6.53

Life of options (in years)		7.0			7.0			7.0

Dividend yield		4.0	%		5.5	%		8.5	%

Volatility		35.00	%		43.00	%		36.57	%

Risk-free interest rate		3.04	%		3.15	%		2.17	%

At December 31, 2011 and 2010, the Company had 431,320 and 228,915, respectively, outstanding unvested shares granted under restricted stock awards. The Company issued 511,817 shares of restricted stock valued at $64,747,000 as part of its stock-based compensation plan during the year ended December 31, 2011, including activity under the 2008 Plan discussed below. Restricted stock vesting during the year ended December 31, 2011 totaled 307,139 shares and had fair values at the grant date ranging from $48.60 to $147.75 per share. The total fair value of shares vested was $35,029,000, $9,805,000 and $10,731,000 for the years ended December 31, 2011, 2010 and 2009, respectively.

Total employee stock-based compensation cost recognized in income was $9,721,000, $9,906,000 and $11,446,000 for the years ended December 31, 2011, 2010 and 2009, respectively, and total capitalized stock-based compensation cost was $5,284,000, $5,117,000 and $6,000,000 for the years ended December 31, 2011, 2010 and 2009, respectively. At December 31, 2011, there was a total of $1,950,000 and $8,037,000 in unrecognized compensation cost for unvested stock options and unvested restricted stock, respectively, which does not include estimated forfeitures. The unrecognized compensation cost for unvested stock options and restricted stock is expected to be recognized over a weighted average period of 1.85 and 2.38 years, respectively.

The Company estimates the forfeiture of stock options and recognizes compensation cost net of the estimated forfeitures. The estimated forfeitures included in compensation cost are adjusted to reflect actual forfeitures at the end of the vesting period. The forfeiture rate at December 31, 2011 was 0.9%. The application of estimated forfeitures did not materially impact compensation expense for the years ended December 31, 2011, 2010 or 2009.

Deferred Stock Performance Plan

On June 1, 2011, the measurement period for the Company’s 2008 deferred stock performance plan (the “2008 Plan”) ended with the maximum award achieved thereunder. This resulted in the Company issuing 397,370 shares of restricted and unrestricted stock valued at $51,153,000. The total cost recognized in earnings in connection with the 2008 Plan was $859,000, $1,454,000 and $1,673,000 for the years ended December 31, 2011, 2010, and 2009 respectively, and total capitalized stock-based compensation cost was $580,000, $933,000 and $895,000 for the years ended December 31, 2011, 2010 and 2009, respectively.

Employee Stock Purchase Plan

In October 1996, the Company adopted the 1996 Non-Qualified Employee Stock Purchase Plan (as amended, the “ESPP”). Initially 1,000,000 shares of common stock were reserved for issuance under this plan. There are currently 740,195 shares remaining available for issuance under the plan. Full-time employees of the Company generally are eligible to participate in the ESPP if, as of the last day of the applicable election period, they have been employed by the Company for at least one month. All other employees of the Company are eligible to participate provided that, as of the applicable election period, they have been employed by the Company for 12 months. Under the ESPP, eligible employees are permitted to acquire shares of the Company’s common stock through payroll deductions, subject to maximum purchase limitations. The purchase period is a period of seven months beginning each April 1 and ending each October 30. The purchase price for common stock purchased under the plan is 85% of the lesser of the fair market value of the Company’s common stock on the first day of the applicable purchase period or the last day of the applicable purchase period. The offering dates, purchase dates and duration of purchase periods may be changed, if the change is announced prior to the beginning of the affected date or purchase period. The Company issued 6,972, 8,137 and 16,971 shares and recognized compensation expense of $216,000, $272,000 and $118,000 under the ESPP for the years ended December 31, 2011, 2010 and 2009, respectively. The Company accounts for transactions under the ESPP using the fair value method prescribed by accounting guidance applicable to entities that use employee share purchase plans.