-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J8nCfJksvDmOvoZ5ZqRUHWWtBKon6K+wZTW5q0MxzsOfoumcw8xWS9+jW58QkyEZ hC2hJseZ3BAIUkt0fgMWww== 0000920522-03-000022.txt : 20030813 0000920522-03-000022.hdr.sgml : 20030813 20030813152254 ACCESSION NUMBER: 0000920522-03-000022 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ESSEX PROPERTY TRUST INC CENTRAL INDEX KEY: 0000920522 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 770369576 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13106 FILM NUMBER: 03840949 BUSINESS ADDRESS: STREET 1: 925 EAST MEADOW DR CITY: PALO ALTO STATE: CA ZIP: 94303 BUSINESS PHONE: 6504943700 MAIL ADDRESS: STREET 1: 925 EAST MEADOW DRIVE CITY: PALO ALTO STATE: CA ZIP: 94303 10-Q 1 form10q.htm 10-Q Q2 2003 DOC


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549




FORM 10-Q



[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2003

OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________to _________

Commission file number 001-13106

Essex Property Trust, Inc.
(Exact name of Registrant as Specified in its Charter)

 
Maryland
77-0369576
  (State or Other Jurisdiction of Incorporation or Organization) 
(I.R.S. Employer Identification Number)

925 East Meadow Drive
Palo Alto, California    94303

(Address of Principal Executive Offices including Zip Code)

(650) 494-3700
(Registrant's Telephone Number, Including Area Code)



    Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [   ]

    Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). YES [X] NO [   ]

APPLICABLE ONLY TO CORPORATE ISSUERS:

    Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date:

21,059,842 shares of Common Stock as of August 1, 2003



ESSEX PROPERTY TRUST, INC.
FORM 10-Q
INDEX

PART I. FINANCIAL INFORMATION Page No.
     
Item 1. Financial Statements (Unaudited):
3
     
           Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002
4
     
           Consolidated Statements of Operations for the three and six
           months ended June 30, 2003 and 2002
5
     
           Consolidated Statements of Stockholders' Equity for the six months
           ended June 30, 2003 and the year ended December 31, 2002
6
     
           Condensed Consolidated Statements of Cash Flows
           for the six months ended June 30, 2003 and 2002
7
     
           Notes to Consolidated Financial Statements
8
     
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
18
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk
29
     
Item 4. Controls and Prodedures
29
     
PART II. OTHER INFORMATION
 
     
Item 4. Submission of Matters to a Vote of Security Holders
30
     
Item 6. Exhibits and Reports on Form 8-K
30
     
Signature
31

2



Part I -- Financial Information

Item 1. Financial Statements (Unaudited)

"Essex" or the "Company" means Essex Property Trust, Inc., a real estate investment trust incorporated in the State of Maryland, or where the context otherwise requires, Essex Portfolio, L.P., a limited partnership (the "Operating Partnership") in which Essex Property Trust, Inc. is the sole general partner.

The information furnished in the accompanying consolidated unaudited balance sheets, statements of operations, stockholders' equity and cash flows of the Company reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the aforementioned consolidated financial statements for the interim periods.

The accompanying unaudited consolidated financial statements should be read in conjunction with the notes to such consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations.


3



ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands, except per share amounts)

                                                            June 30,    December 31,
                                                              2003          2002
                                                          ------------  ------------
                         Assets
Real estate:
  Rental properties:
     Land and land improvements                          $    392,041  $    368,712
     Buildings and improvements                             1,208,843     1,147,244
                                                          ------------  ------------
                                                            1,600,884     1,515,956
     Less accumulated depreciation                           (214,993)     (191,821)
                                                          ------------  ------------
                                                            1,385,891     1,324,135
  Investments                                                  68,642        61,212
  Real estate under development                                88,831       143,756
                                                          ------------  ------------
                                                            1,543,364     1,529,103
Cash and cash equivalents-unrestricted                          8,854         8,562
Cash and cash equivalents-restricted                            9,079         9,265
Notes receivable from investees and related parties            25,990        24,081
Notes and other receivables                                    32,921        31,318
Prepaid expenses and other assets                              12,255        11,133
Deferred charges, net                                           5,757         6,272
                                                          ------------  ------------
                                                         $  1,638,220  $  1,619,734
                                                          ============  ============

          Liabilities and Stockholders' Equity
Mortgage notes payable                                   $    662,712  $    677,563
Lines of credit                                               165,000       126,500
Accounts payable and accrued liabilities                       33,334        35,791
Dividends payable                                              20,425        17,879
Other liabilities                                               8,385         8,157
                                                          ------------  ------------
          Total liabilities                                   889,856       865,890
Minority interests                                            264,189       262,530
Stockholders' equity:
  Common stock, $.0001 par value, 656,682,178
    authorized, 21,054,792 and 20,983,193
    issued and outstanding                                          2             2
  Cumulative redeemable preferred stock; $.0001
    par value, no shares issued and outstanding:
    7.875% Series B 2,000,000 shares authorized                    --            --
    9.125% Series C 500,000 shares authorized                      --            --
    9.30% Series D 2,000,000 shares authorized                     --            --
    9.25% Series E 2,200,000 shares authorized                     --            --
  Excess stock, $.0001 par value, 330,000,000 shares
    authorized and no shares issued and outstanding                --            --
  Additional paid-in capital                                  539,914       535,125
  Distributions in excess of accumulated earnings             (55,741)      (43,813)
                                                          ------------  ------------
          Total stockholders' equity                          484,175       491,314
                                                          ------------  ------------
Commitments and contingencies
                                                         $  1,638,220  $  1,619,734
                                                          ============  ============

See accompanying notes to the consolidated unaudited financial statements.

4



ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except per share amounts)


                                                            Three Months Ended        Six Months Ended
                                                                  June 30,                  June 30,
                                                         ------------------------  ------------------------
                                                            2003         2002         2003         2002
                                                         -----------  -----------  -----------  -----------
Revenues:
   Rental                                               $    53,538  $    41,769  $   107,700  $    83,888
   Other property                                             1,743        1,396        3,477        2,712
                                                         -----------  -----------  -----------  -----------
      Total property                                         55,281       43,165      111,177       86,600
   Interest and other                                         3,166        7,818        6,265       13,795
                                                         -----------  -----------  -----------  -----------
      Total revenues                                         58,447       50,983      117,442      100,395
                                                         -----------  -----------  -----------  -----------
Expenses:
   Property operating expenses:
      Maintenance and repairs                                 4,063        2,356        7,936        5,165
      Real estate taxes                                       4,361        3,119        8,737        6,269
      Utilities                                               3,075        2,253        5,712        4,284
      Administrative                                          4,588        3,045       10,573        6,671
      Advertising                                             1,002          732        1,862        1,354
      Insurance                                                 865          490        1,581          833
      Depreciation and amortization                          11,556        9,114       23,165       18,100
                                                         -----------  -----------  -----------  -----------
                                                             29,510       21,109       59,566       42,676
   Interest                                                  10,531        8,652       21,330       17,441
   Amortization of deferred financing costs                     318          147          492          295
   General and administrative                                 1,692        1,565        3,530        3,265
                                                         -----------  -----------  -----------  -----------
      Total expenses                                         42,051       31,473       84,918       63,677
                                                         -----------  -----------  -----------  -----------
      Income from continuing operations before
        minority interests and discontinued
        operations                                           16,396       19,510       32,524       36,718
   Minority interests                                        (5,746)      (6,285)     (11,643)     (12,349)
                                                         -----------  -----------  -----------  -----------
      Income from continuing operations                      10,650       13,225       20,881       24,369

Discontinued operations (net of minority interests):
   Income from real estate sold                                  --           69           --          225
   Gain on sale of real estate                                   --        8,064           --        8,061
                                                         -----------  -----------  -----------  -----------
      Net income                                        $    10,650  $    21,358  $    20,881  $    32,655
                                                         ===========  ===========  ===========  ===========
Per share data:
   Basic:
      Income from continuing operations available to
        common stockholders                             $      0.51  $      0.71  $      0.99  $      1.31
      Income from discontinued operations                        --         0.44           --         0.45
                                                         -----------  -----------  -----------  -----------
      Net income                                        $      0.51  $      1.15  $      0.99  $      1.76
                                                         ===========  ===========  ===========  ===========
      Weighted average number of shares
        outstanding during the period                    21,036,074   18,603,394   21,016,102   18,550,243
                                                         ===========  ===========  ===========  ===========
   Diluted:
      Income from continuing operations available to
        common stockholders                             $      0.50  $      0.71  $      0.98  $      1.31
      Income from discontinued operations                        --         0.43           --         0.44
                                                         -----------  -----------  -----------  -----------
      Net income                                        $      0.50  $      1.14  $      0.98  $      1.75
                                                         ===========  ===========  ===========  ===========
      Weighted average number of shares
        outstanding during the period                    21,288,824   18,793,987   21,240,996   18,723,502
                                                         ===========  ===========  ===========  ===========

   Dividend per share                                   $      0.78  $      0.77  $      1.56  $      1.54
                                                         ===========  ===========  ===========  ===========

See accompanying notes to the consolidated unaudited financial statements.

5



ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity
for the six months ended June 30, 2003 and the
year ended December 31, 2002
(Unaudited)
(Dollars and shares in thousands)


                                                                                        Distributions
                                     Preferred stock      Common stock       Additional in excess of
                                  -------------------- --------------------   paid-in    accumulated
                                   Shares     Amount    Shares     Amount     capital     earnings       Total
                                  ---------  --------- ---------  ---------  ---------  -------------  ---------
Balances at December 31, 2001           --  $      --    18,428  $       2  $ 421,592  $     (39,920) $ 381,674
Shares purchased by Operating
   Partnership                          --         --      (411)        --    (19,715)            --    (19,715)
Issuance of common stock under
   stock-based compensation plans       --         --       246         --      3,376             --      3,376
Issuance of common stock                --         --     2,720         --    136,809             --    136,809
Reallocation of minority interest       --         --        --         --     (6,937)            --     (6,937)
Net income                              --         --        --         --         --         52,874     52,874
Dividends declared                      --         --        --         --         --        (56,767)   (56,767)
                                  ---------  --------- ---------  ---------  ---------  -------------  ---------
Balances at December 31, 2002           --         --    20,983          2    535,125        (43,813)   491,314
Issuance of common stock under
   stock-based compensation plans       --         --        72         --      2,462             --      2,462
Reallocation of minority interest       --         --        --         --      2,327             --      2,327
Net income                              --         --        --         --         --         20,881     20,881
Dividends declared                      --         --        --         --         --        (32,809)   (32,809)
                                  ---------  --------- ---------  ---------  ---------  -------------  ---------
Balances at June 30, 2003               --  $      --    21,055  $       2  $ 539,914  $     (55,741) $ 484,175
                                  =========  ========= =========  =========  =========  =============  =========

See accompanying notes to the consolidated unaudited financial statements.

6



ESSEX PROPERTY TRUST, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)



                                                                                              Six Months Ended
                                                                                                  June 30,
                                                                                            --------------------
                                                                                              2003       2002
                                                                                            ---------  ---------
Net cash provided by operating activities                                                  $  50,100  $  45,359
                                                                                            ---------  ---------
Cash flows from investing activities:
   Additions to real estate:
       Improvements to recent acquisitions                                                    (2,245)    (1,688)
       Redevelopment                                                                            (736)    (4,810)
       Revenue generating capital expenditures                                                  (105)      (430)
       Non-revenue generating capital expenditures                                            (4,210)    (2,837)
   Increase/(Decrease) in restricted cash                                                        186       (712)
   Additions to notes receivable from investees, other
      related parties and other receivables                                                   (5,962)    (9,151)
   Repayment of notes receivable from investees, other
      related parties and other receivables                                                      318      4,440
   Additions to real estate under development                                                (13,399)   (30,202)
   Net distributions from (contributions to) investments in corporations
      and limited partnerships                                                                (5,518)    12,623
                                                                                            ---------  ---------
       Net cash used in investing activities                                                 (31,671)   (32,767)
                                                                                            ---------  ---------
Cash flows from financing activities:
   Proceeds from mortgage and other notes payable and lines of credit                         49,140     39,000
   Repayment of mortgage and other notes payable and lines of credit                         (25,491)    (9,981)
   Additions to deferred charges                                                                (115)    (1,041)
   Net proceeds from stock options exercised and shares issued through
      dividend reinvestment plan                                                               2,004      2,196
   Contributions from minority interest partners                                                  --        (14)
   Distributions to minority interest partners                                               (10,140)   (12,514)
   Shares purchased by Operating Partnership                                                      --       (499)
   Redemption of Operating Partnership units                                                    (542)      (309)
   Dividends paid                                                                            (32,993)   (27,206)
                                                                                            ---------  ---------
      Net cash used in financing activities                                                  (18,137)   (10,368)
                                                                                            ---------  ---------
Net increase in cash and cash equivalents                                                        292      2,224
Cash and cash equivalents at beginning of period                                               8,562      6,440
                                                                                            ---------  ---------
Cash and cash equivalents at end of period                                                 $   8,854  $   8,664
                                                                                            =========  =========
Supplemental disclosure of cash flow information:
   Cash paid for interest, net of $1,869 and $3,244 capitalized                            $  19,144  $  14,706
                                                                                            =========  =========

Supplemental disclosure of non-cash investing and financing activities:
   Proceeds from disposition of real estate held by exchange
        facilitator and classified as other asset                                          $      --  $  19,477
                                                                                            =========  =========

   Additional investment in limited partnership:
        Investments                                                                        $      --  $   3,681
        Accounts payable                                                                          --     (3,681)
                                                                                            ---------  ---------
                                                                                           $      --  $      --
                                                                                            =========  =========

   Issuance of Operating Partnership Units in connection with the purchase of real estate  $   5,768  $      --
                                                                                            =========  =========

   Real estate under development transferred to rental property                            $  72,711  $      --
                                                                                            =========  =========

   Common stock issued pursuant to phantom stock plan                                      $     458  $      --
                                                                                            =========  =========

See accompanying notes to the consolidated unaudited financial statements.

7



ESSEX PROPERTY TRUST, INC. ANDSUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2003 and 2002
(Unaudited)
(Dollars in thousands, except per share and per unit amounts)

(1) Organization and Basis of Presentation

The unaudited consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q. In the opinion of management, all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented have been included and are normal and recurring in nature. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's annual report on Form 10-K for the year ended December 31, 2002.

The unaudited consolidated financial statements for the three and six months ended June 30, 2003 and 2002 include the accounts of the Company and Essex Portfolio, L.P. (the "Operating Partnership", which holds the operating assets of the Company). The Company is the sole general partner in the Operating Partnership, with a 90.1%, 90.0% and 89.0% general partnership interest as of June 30, 2003, December 31, 2002 and June 30, 2002, respectively.

As of June 30, 2003, the Company operates and has ownership interests in 118 multifamily properties (containing 25,125 units), five recreational vehicle parks (comprising 1,717 spaces), four office buildings (with approximately 63,540 square feet) and two manufactured housing communities (containing 607 sites), (collectively, the "Properties"). The Properties are located in Southern California (Los Angeles, Ventura, Orange and San Diego counties), Northern California (the San Francisco Bay Area), the Pacific Northwest (the Seattle, Washington and Portland, Oregon metropolitan areas) and other areas (Houston, Texas, Las Vegas, Nevada and Hemet, California).

Essex Apartment Value Fund, L.P. (the "Fund"), is an investment fund organized by the Company and will be, subject to specific exceptions, the Company's exclusive investment vehicle for new investments until the Fund's committed capital has been invested or committed for investments, or if earlier, December 31, 2003. An affiliate of the Company, Essex VFGP, L.P. ("VFGP"), is a 1% general partner and is a 20.4% limited partner. The Operating Partnership owns a 99% limited partnership interest in VFGP. The Fund has total capital commitments of $250 million and is expected to utilize leverage of approximately 65% of the value of the underlying real estate portfolio. The Company is committed to invest 21.4% of the aggregate capital committed to the Fund. In addition, Essex will be compensated by the Fund for its asset management, property management, development and redevelopment services and may receive incentive payments if the Fund exceeds certain financial return benchmarks. At June 30, 2003 the Fund was approximately 90% invested.

The Company invests in joint ventures, which generally involve multifamily property acquisitions. For joint ventures entered into prior to January 31, 2003, the Company accounts for these investments under the equity or consolidation methods of accounting based on the voting control it exercises through its ownership interests in these affiliates. For joint ventures entered into after January 31, 2003, the Company follows the guidance provided by FASB Interpretation No 46 (FIN 46), "Consolidation of Variable Interest Entities." The Company did not enter into any new joint ventures during the quarter ended June 30, 2003. Under the equity method of accounting, the investment is carried at the cost of assets contributed or distributed, plus the Company's equity in undistributed earnings or losses since its initial investment. The individual assets, liabilities, revenues and expenses of the joint venture are not recorded in the Company's consolidated financial statements.


8



Included in the Company's investments accounted for under the equity method are limited partnership interests in 17 partnerships (Down REIT entities), which collectively own ten multifamily properties, comprised of 1,831 units. These investments were made under arrangements whereby Essex Management Corporation (EMC) became the general partner, the Operating Partnership became a special minority interest limited partner, and the other limited partners were granted rights of redemption for their interests. Such partners can request to be redeemed and the Company can elect to redeem their rights for cash or by issuing shares of its common stock on a one share per unit basis. Conversion values will be based on the market value of the Company's common stock at the time of redemption multiplied by the number of units stipulated under the above arrangements. The other limited partners receive distributions based on the Company's current dividend rate times the number of redemption shares. At June 30, 2003, the maximum number of shares that could be required to meet redemption of these Down REIT entities is 1,468,198. The equity in income or loss reported by the Company under the equity method of accounting for these down REIT entities is the net income of these down REIT entities as reduced by the income allocated to the other limited partners which is equal to the distributions they received.

All significant intercompany balances and transactions have been eliminated in the consolidated financial statements.

The Company's equity in income from investments accounted for using the equity method was $1,809 and $2,798 for the three months ended June 30, 2003 and 2002, respectively, and $3,610 and $5,300 for the six months ended June 30, 2003 and 2002, respectively, and is classified as "Interest and other income" in the accompanying consolidated statement of operations.

Certain prior year balances have been reclassified to conform to the current year presentation.


9



Stock-based Compensation

The Company applies APB Opinion No. 25 (APB 25) and related interpretations in accounting for its stock-based compensation plans granted to employees and directors. Under APB 25, no compensation cost has been recognized for stock options granted to employees and directors since all such stock options were granted with an exercise price equal to the fair market value of the underlying common stock. For the Company's long-term incentive plan and phantom stock plan, no compensation expense was recognized during the three months ended June 30, 2003 and 2002 and $408 and $911 was recognized for the six months ended June 30, 2003 and 2002, respectively. Had compensation cost for these stock options and the Company's other plans been determined based on the fair value at the grant dates consistent with the fair value method pursuant to FAS 123, the Company's net income applicable to common stockholders for the three and six months ended June 30, 2003 and 2002 would have been reduced to the pro forma amounts indicated below:

                                            --------------------   --------------------
                                             Three Months Ended       Six Months Ended
                                                   June 30,               June 30,
                                            --------------------   --------------------
                                              2003       2002        2003       2002
                                            ---------  ---------   ---------  ---------
Net income available to common stockholders:
   As reported                             $  10,650  $  21,358   $  20,881  $  32,655
   Pro forma                                  10,523     21,232      20,627     32,403

Basic earnings per common share:
   As reported                             $    0.51  $    1.15   $    0.99  $    1.76
   Pro forma                                    0.50       1.14        0.98       1.75

Diluted earnings per common share:
   As reported                             $    0.50  $    1.14   $    0.98  $    1.75
   Pro forma                                    0.49       1.13        0.97       1.73

Weighted-average fair value of stock
   options granted during the periods
   presented                               $    3.86  $    4.69   $    3.86  $    4.69

The fair value of stock options granted each period was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants:


                               Three Months Ended       Six Months Ended
                                    June 30,                June 30,
                             ----------------------- ------------------------
                                2003        2002         2003        2002
                             ----------- ----------- ------------ -----------
Risk-free interest rates     2.58%-2.78% 3.08%-4.62% 2.17%-2.78%  3.08%-4.62%
Expected lives                 6 years     6 years     6 years      6 years
Volatility                     17.89%      18.92%    17.89%-17.91%  18.92%
Dividend yield               5.75%-5.91%    6.30%    5.75%-6.12%     6.30%


10



(2) Significant Transactions for the Quarter ended June 30, 2003

  1. Development Communities
  2. The Company defines development communities as new apartment properties that are being constructed or are newly constructed and in a phase of lease-up and have not yet reached stabilized operations. At June 30, 2003, the Company (including the Fund's development communities) had ownership interests in six development communities, with an aggregate of 1,368 multifamily units and an estimated total cost of $246,300 of which approximately $107,700 remains to be expended and of which approximately $49,300 is the Company's commitment.

    During the second quarter, the Company neared construction completion and continued lease-up at The San Marcos (phase I), a 312-unit apartment community located in Richmond, California. The Company projects that The San Marcos (phase I) will reach stabilized operations during the third quarter of 2003. During the quarter, the Company committed to an additional 120 units at this project (phase II) at an estimated cost of $23,900. It is anticipated that construction of these additional units will be completed in the second quarter of 2004 and is expected to reach stabilized operations in the fourth quarter of 2004.

    Also during the quarter the Company continued construction of Hidden Valley, a 324-unit apartment community located in Simi Valley, California. The Company expects initial occupancy to take place in the fourth quarter of 2003 and to reach stabilized operations in the third quarter of 2004. The Company has a 75 percent ownership interest in this development project.

  3. Redevelopment Communities
  4. The Company defines redevelopment communities as existing properties owned or recently acquired which have been targeted for investment by the Company with the expectation of increased financial returns through property improvement. Redevelopment communities typically have apartment units that are not available for rent and, as a result, may have less than stabilized operations. At June 30, 2003, the Company (including the Fund's redevelopment communities) has ownership interests in two redevelopment communities, which contain an aggregate of 782 units and an estimated total cost of $6,900 of which approximately $5,200 remains to be expended and of which approximately $3,500 is the Company's commitment.

  5. Debt
  6. Subsequent to the quarter end the Company expanded its existing $165,000 unsecured revolving credit facility to $185,000. No other terms of this facility were revised.

  7. Other
  8. In August 2000 an affiliate of the Company sold a vacant 110,000 square foot office building located in Irvine, California to a third party for $15,000. The Company loaned the buyer $15,000 as a secured first mortgage on the property. In addition, after the buyer expended $500 for such items as tenant improvements, leasing commissions, and carrying costs, the Company would lend an additional $4,500 to the buyer for these related items. The current balance of the mezzanine loan is approximately $3,800, of which $1,700 is guaranteed by the principal shareholder. The Company has evaluated the realization potential of the first and mezzanine loan and effective June 2002, ceased accruing interest income on these notes until it is clearer as to the cash flow that the office building will generate upon lease up. The loan matured in March 2003 and management is currently evaluating its course of action.

  9. Private Equity Fund

Acquisition Activities of the Essex Apartment Value Fund

On May 1, 2003 the Fund purchased Huntington Villas, a 400-unit apartment community located in Huntington Beach, California, for a contract price of $58,200. In connection with this transaction the Fund obtained a non-recourse mortgage in the amount of $38,514, with a 4.64% fixed interest rate, which matures in May 2010.

On May 1, 2003 the Fund purchased three multifamily properties comprised of 288 apartment homes located in San Dimas, California. The Villas at San Dimas Canyon, a 156-unit apartment community was purchased for a contract price of $20,010. In connection with this transaction the Fund obtained a non-recourse mortgage in the amount of $13,007, with a 4.67% fixed interest rate, which matures in May 2010. The Villas at San Bonita, a 102-unit apartment community was purchased for a contract price of $12,730. In connection with this transaction the Fund obtained a non-recourse mortgage in the amount of $8,275, with a 4.67% fixed interest rate, which matures in May 2010. The Villas, a 30- unit apartment community was purchased for a contract price of $3,910. This property is not encumbered by any mortgage.


11



On May 29, 2003 the Fund purchased Villa Venetia Apartments, a 468-unit apartment community located in Costa Mesa, California, for a contract price of $74,000. In connection with this transaction the Fund obtained a non-recourse mortgage in the amount of $54,000, with a 4.58% fixed interest rate for a 9-year term, which matures in June 2012, with an option to extend the maturity for one year thereafter at a floating rate of 2.5% over Freddie Mac's Reference Bill. During the extension period, the loan may be paid in full with no prepayment penalty.

Development Communities of the Fund

At June 30, 2003 the Fund has three development communities with an aggregate of 612 multifamily units and an estimated total cost of $124,100 of which $74,300 remains to be expended and approximately $15,900 is the Company's commitment.

Debt Transactions of the Fund

On April 11, 2003, the Fund obtained a non-recourse mortgage on a previously unencumbered property in the amount of $10,000, with a 5.42% fixed interest rate for a 9-year term, which matures in May 2013, with an option to extend the maturity for one year thereafter at a floating rate of 2.5% over Freddie Mac's Reference Bill. During the extension period, the loan may be paid in full with no prepayment penalty.

Subsequent Event

On July 11, 2003, the Fund acquired an ownership interest in Coronado North and South, located in Newport Beach, California, for approximately $33,700 from an unrelated co-investment partner.


12



(3) Related Party Transactions  

All general and administrative expenses of the Company and Essex Management Corporation, an unconsolidated preferred stock subsidiary of the Company ("EMC"), are initially borne by the Company, with a portion subsequently allocated to EMC. Expenses allocated to EMC for the three months ended June 30, 2003 and 2002 totaled $692 and $708, respectively, and $1,292 and $1,478 for the six months ended June 30, 2003 and 2002, respectively. The allocation is reflected as a reduction in general and administrative expenses in the accompanying consolidated statements of operations.

Interest and other income includes interest income earned on notes receivable from investees of $79 and $1,097 for the three months ended June 30, 2003 and 2002, respectively, and $158 and $2,158 for the six months ended June 30, 2003 and 2002, respectively. Other income also includes management fee income and investment income from the Company's investees of $2,761 and $3,010 for the three months ended June 30, 2003 and 2002, respectively, and $5,777 and $5,589 for the six months ended June 30, 2003 and 2002, respectively.

Notes receivable from investees and other related party receivables as of June 30, 2003 and December 31, 2002 consist of the following:


                                                                                    June 30,    December 31,
                                                                                      2003          2002
                                                                                  ------------  ------------
   Notes receivable from joint venture investees:

      Note receivable from Highridge Apartments, secured, bearing
      interest at 10%, due on demand                                             $      2,950  $      2,950

      Notes receivable from Essex Fidelity I Corp ("EFC"), secured,
      bearing interest at LIBOR + 2.5%, due 2004                                       15,069        14,979

      Note receivable from EFC, unsecured, bearing interest at 7.5%, due 2011             390           726

      Receivable from Newport Beach North, LLC and Newport Beach South, LLC,
      unsecured, non interest bearing, due on demand                                    1,361           376

   Other related party receivables:

      Loans to officers prior to July 31, 2002, secured, bearing interest at 8%,
      due April 2006                                                                      633           633

      Other related party receivables, substantially due on demand                      5,587         4,417
                                                                                  ------------  ------------
                                                                                 $     25,990  $     24,081
                                                                                  ============  ============

The Company's officers and directors do not have substantial economic interest in these joint venture investees.

Other related party receivables consist primarily of accrued interest income on notes receivable from joint venture investees and loans to officers, advances and accrued management fees from joint venture investees and unreimbursed expenses due from EMC.


13



(4) New Accounting Pronouncements

In January 2003, the FASB approved for issuance FASB Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities." FIN 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements" to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. FIN 46 may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. The disclosure requirements of FIN 46 are effective for all financial statements initially issued after January 31, 2003. It is reasonably possible that certain of the entities through which and with which the Company conducts business, including those described in Notes 3(b) and 5 of the Company's December 31, 2002 consolidated financial statements will be deemed to be Variable Interest Entities (VIEs) under the provisions of FIN 46. The total assets and liabilities net of intercompany balances of such entities were estimated at $77,216 and $47,098 at June 30, 2003. The Company's estimated maximum exposure to loss would be equal to its investments in these arrangements, which totaled $30,485, as of June 30, 2003. The disclosures provided reflect management's understanding and analysis of FIN 46 based upon information currently available. The evaluation of the Company's various arrangements is ongoing and is subject to change in the event additional interpretive guidance is provided by the Financial Accounting Standards Board or others.

In May 2003, the FASB issued Statement of Financial Accounting Standard No. 150 ("FAS 150"), "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". FAS 150 requires issuers to classify as liabilities (or assets in some circumstances) three classes of freestanding financial instruments that embody obligations for the issuer. Previously, many such instruments had been classified as equity. A freestanding financial instrument is an instrument that is entered into separately and apart from any of the entity's other financial instruments or equity transactions, or that is entered into in conjunction with some other transaction and is legally detachable and separately exercisable, such as certain put and call options. These provisions are effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company is currently evaluating the impact of adopting FAS 150.


14



(5) Segment Information

The Company defines its reportable operating segments as the three geographical regions in which its properties are located: Southern California, Northern California and the Pacific Northwest. Excluded from segment revenues are properties outside of these regions and interest and other income. Nonsegment revenues and net operating income included in the following schedule also consists of revenue generated from the commercial properties, recreational vehicle parks, and manufactured housing communities. Other nonsegment assets include investments, real estate under development, cash, notes receivables, other assets and deferred charges. The revenues, net operating income, and assets for each of the reportable operating segments are summarized as follows for the periods presented.



                                                           Three Months Ended
                                                               June 30,
                                                        ------------------------
                                                           2003         2002
                                                        -----------  -----------
Revenues:
    Southern California                                $    26,669  $    18,018
    Northern California                                     15,503       14,443
    Pacific Northwest                                       10,214       10,567
    Other non-segment areas                                  2,895          137
                                                        -----------  -----------
                                                            55,281       43,165
Interest and other income                                    3,166        7,818
                                                        -----------  -----------
        Total revenues                                 $    58,447  $    50,983
                                                        ===========  ===========
Net operating income:
    Southern California                                $    18,649  $    13,036
    Northern California                                     10,810       10,921
    Pacific Northwest                                        6,496        7,093
    Other non-segment areas                                  1,372          120
                                                        -----------  -----------
        Total net operating income                          37,327       31,170
Interest and other income                                    3,166        7,818
Depreciation and amortization:
    Southern California                                     (5,060)      (3,491)
    Northern California                                     (3,043)      (2,759)
    Pacific Northwest                                       (2,669)      (2,790)
    Other non-segment areas                                   (784)         (74)
                                                        -----------  -----------
                                                           (11,556)      (9,114)
Interest:
    Southern California                                     (3,418)      (1,856)
    Northern California                                     (2,803)      (2,831)
    Pacific Northwest                                       (1,014)      (1,526)
    Other non-segment areas                                 (3,296)      (2,439)
                                                        -----------  -----------
                                                           (10,531)      (8,652)
Amortization of deferred financing costs                      (318)        (147)
General and administrative                                  (1,692)      (1,565)
                                                        -----------  -----------
        Income from continuing operations before
          minority interests and discontinued
          operations                                   $    16,396  $    19,510
                                                        ===========  ===========

15



(5) Segment Information (continued)

                                                           Six Months Ended
                                                               June 30,
                                                        ------------ -----------
                                                           2003         2002
                                                        -----------  -----------
Revenues:
    Southern California                                $    53,075  $    35,436
    Northern California                                     31,107       29,674
    Pacific Northwest                                       20,535       21,212
    Other non-segment areas                                  6,460          278
                                                        -----------  -----------
        Total segment revenues                             111,177       86,600
Interest and other income                                    6,265       13,795
                                                        -----------  -----------
        Total revenues                                 $   117,442  $   100,395
                                                        ===========  ===========
Net operating income:
    Southern California                                $    36,706  $    24,991
    Northern California                                     21,700       22,479
    Pacific Northwest                                       13,226       14,401
    Other non-segment areas                                  3,144          153
                                                        -----------  -----------
        Total segment net operating income                  74,776       62,024
Interest and other income                                    6,265       13,795
Depreciation and amortization:
    Southern California                                    (10,303)      (6,853)
    Northern California                                     (6,213)      (5,511)
    Pacific Northwest                                       (5,411)      (5,588)
    Other non-segment areas                                 (1,238)        (148)
                                                        -----------  -----------
                                                           (23,165)     (18,100)
Interest:
    Southern California                                     (6,889)      (3,694)
    Northern California                                     (5,590)      (5,641)
    Pacific Northwest                                       (2,081)      (3,047)
    Other non-segment areas                                 (6,770)      (5,059)
                                                        -----------  -----------
                                                           (21,330)     (17,441)
Amortization of deferred financing costs                      (492)        (295)
General and administrative                                  (3,530)      (3,265)
                                                        -----------  -----------
        Income from continuing operations before
          minority interests and discontinued
          operations                                   $    32,524  $    36,718
                                                        ===========  ===========



                                                         June 30,    December 31,
                                                           2003         2002
                                                        -----------  -----------
Assets:
  Net real estate assets:
    Southern California                                $   694,669  $   700,877
    Northern California                                    366,685      293,541
    Pacific Northwest                                      247,091      251,252
    Other non-segment areas                                 77,446       78,465
                                                        -----------  -----------
        Total net real estate assets                     1,385,891    1,324,135
  Other non-segment assets                                 252,329      295,599
                                                        -----------  -----------
        Total assets                                   $ 1,638,220  $ 1,619,734
                                                        ===========  ===========

16



(6) Net Income Per Share


                                                 Three Months Ended                Three Months Ended
                                                   June 30, 2003                     June 30, 2002
                                          --------------------------------  --------------------------------
                                                      Weighted      Per                 Weighted      Per
                                                       Average     Share                 Average     Share
                                           Income      Shares      Amount    Income      Shares      Amount
                                          ---------  -----------  --------  ---------  -----------  --------
Basic:
  Income from continuing operations      $  10,650   21,036,074  $   0.51  $  13,225   18,603,394  $   0.71
  Income from discontinued operations           --   21,036,074        --      8,133   18,603,394      0.44
                                          ---------               --------  ---------               --------
                                            10,650               $   0.51     21,358               $   1.15
                                                                  ========                          ========
  Effect of Dilutive Securities:
    Convertible limited partnership
      Units(1)                                  --           --                   --           --
    Stock options (2)                           --      196,750                   --      190,593
    Vested series Z incentive units             --       56,000                   --           --
                                          ---------  -----------            ---------  -----------
                                                --      252,750                   --      190,593
                                          ---------  -----------            ---------  -----------
Diluted:
  Income from continuing operations         10,650   21,288,824  $   0.50     13,225   18,793,987  $   0.71
  Income from discontinued operations           --   21,288,824        --      8,133   18,793,987      0.43
                                          ---------               --------  ---------               --------
                                         $  10,650               $   0.50  $  21,358               $   1.14
                                          =========               ========  =========               ========


                                                 Six Months Ended                  Six Months Ended
                                                  June 30, 2003                     June 30, 2002
                                          --------------------------------  --------------------------------
                                                      Weighted      Per                 Weighted      Per
                                                       Average     Share                 Average     Share
                                           Income      Shares      Amount    Income      Shares      Amount
                                          ---------  -----------  --------  ---------  -----------  --------
Basic:
  Income from continuing operations      $  20,881   21,016,102  $   0.99  $  24,369   18,550,243  $   1.31
  Income from discontinued operations           --   21,016,102        --      8,286   18,550,243      0.45
                                          ---------               --------  ---------               --------
                                            20,881               $   0.99     32,655               $   1.76
                                                                  ========                          ========

  Effect of Dilutive Securities:
    Convertible limited partnership
      Units(1)                                  --           --                   --           --
    Stock options (2)                           --      169,071                   --      173,259
    Vested series Z incentive units             --       55,823                   --           --
                                          ---------  -----------            ---------  -----------
                                                --      224,894                   --      173,259
                                          ---------  -----------            ---------  -----------
 Diluted:
  Income from continuing operations         20,881   21,240,996  $   0.98     24,369   18,723,502  $   1.31
  Income from discontinued operations           --   21,240,996        --      8,286   18,723,502      0.44
                                          ---------               --------  ---------               --------
                                         $  20,881               $   0.98  $  32,655               $   1.75
                                          =========               ========  =========               ========

(1) Convertible limited partnership units of 2,269,490 and 2,281,277 for the three months ended June 30, 2003 and 2002, respectively, and 2,270,391 and 2,283,418 for the six months ended June 30, 2003 and 2002, respectively, were not included because they were anti-dilutive.

(2) The following stock options are not included in the diluted earnings per share calculation because the exercise price of the option was greater than the average market price of the common share for the quarter and, therefore, would be anti-dilutive:

                              Three Months Ended              Six Months Ended
                                  June 30,                        June 30,
                        ----------------------------    ---------------------------
                             2003          2002              2003         2002
                        -------------  -------------    ------------- -------------
Number of options           20,000        4,000             23,500       66,250
Range of exercise prices    $57.57     $52.19-54.25      $54.02-57.57  $50.48-54.2


17



Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion is based primarily on the consolidated unaudited financial statements of Essex Property Trust, Inc. ("Essex" or the "Company") for the three and six months ended June 30, 2003 and 2002. This information should be read in conjunction with the accompanying consolidated unaudited financial statements and notes thereto. These consolidated financial statements include all adjustments which are, in the opinion of management, necessary to reflect a fair statement of the results and all such adjustments are of a normal recurring nature.  

Substantially all of the assets of the Company are held by, and substantially all operations are conducted through, Essex Portfolio, L.P. (the "Operating Partnership"). The Company is the sole general partner of the Operating Partnership and, as of June 30, 2003, December 31, 2002 and June 30, 2002, with a 90.1%, 90.0% and 89.0% general partnership interest in the Operating Partnership, respectively. The Company has elected to be treated as a real estate investment trust ("REIT") for federal income tax purposes.

General Background

The Company's property revenues are generated primarily from multifamily property operations, which accounted for greater than 95% of its property revenues for the three and six months ended June 30, 2003 and 2002. The Company's multifamily properties (the "Properties") are located in Southern California (Los Angeles, Ventura, Orange and San Diego counties), Northern California (the San Francisco Bay Area), the Pacific Northwest (the Seattle, Washington and Portland, Oregon metropolitan areas) and other areas (Houston, Texas, Las Vegas, Nevada and Hemet, California).  

Essex Apartment Value Fund, L.P. (the "Fund"), is an investment fund organized by the Company in 2001. The Fund will be, subject to specific exceptions, the Company's exclusive investment vehicle for new investments until the Fund's committed capital has been invested or committed for investments, or if earlier, December 31, 2003. The Fund has total capital commitments of $250 million and is expected to utilize leverage of approximately 65% of the value of the underlying real estate portfolio. The Company is committed to invest 21.4% of the aggregate capital committed to the Fund. In addition, the Company will be compensated by the Fund for its asset management, property management, development and redevelopment services and may receive incentive payments if the Fund exceeds certain financial return benchmarks. Since its formation, the Fund has acquired fifteen multifamily residential properties, representing 3,479 apartment units with an aggregate purchase price of approximately $413 million, excluding redevelopment expenses, and disposed of one multifamily residential property, consisting of 500 apartment units at a gross sales price of approximately $69.0 million resulting in a net realized gain of approximately $5.7 million. In addition, three development land parcels, where approximately 612 apartment units are planned for construction, have been purchased by the Fund with a total estimated cost for the projects of approximately $124.1 million. As of June 30, 2003, the remaining commitments to fund these projects is approximately $74.3 million of which approximately $15.9 million is the Company's commitment.

The Company has elected to be treated as a REIT for federal income tax purposes, commencing with the year ended December 31, 1994. The Company provides a majority of its fee based asset management and disposition services as well as third-party property management and leasing services through Essex Management Corporation ("EMC"), in order to maintain compliance with REIT tax rules. The Company owns 100% of EMC's 19,000 shares of nonvoting preferred stock.  Executives of the Company own 100% of EMC's 1,000 shares of Common Stock.


18



Since the Company's initial public offering (the "IPO") in June 1994, the Company has acquired ownership interests in 105 multifamily residential properties, its headquarters building, three Southern California office buildings, five recreational vehicle parks, and two manufactured housing communities. With respect to the multifamily residential properties that the Company acquired, 14 are located in Northern California, 69 are located in Southern California, 15 are located in the Seattle Metropolitan Area, five are located in the Portland Metropolitan Area and two are located in other areas. In total, these acquisitions consist of 22,236 units with total capitalized acquisition costs of approximately $2,012.7 million. Additionally, since its IPO, the Company has developed and has ownership interests in ten multifamily properties that have reached stabilized operations. These development properties consist of 2,406 units with total capitalized development costs of $309.5 million. As part of its active portfolio management strategy, the Company has disposed of, since its IPO, twelve multifamily residential properties (six in Northern California, five in Southern California and one in the Pacific Northwest) consisting of a total of 2,014 units, six retail shopping centers in the Portland, Oregon metropolitan area and its former headquarters building located in Northern California at an aggregate gross sales price of approximately $259.5 million resulting in a net realized gain of approximately $53.8 million.

The Company (excluding the Fund's development communities) has ownership interests in and is developing three multifamily residential communities, with an aggregate of 756 multifamily units. In connection with these development projects, the Company has directly entered into contractual construction related commitments with unrelated third parties and the total projected estimated cost for these projects is approximately $122.2 million. As of June 30, 2003, the remaining commitment to fund these projects is approximately $33.4 million.

Results of Operations  

Comparison of the Three Months Ended June 30, 2003 to the Three Months Ended June 30, 2002

Average financial occupancy rates of the Company's multifamily Quarterly Same Store Properties (stabilized properties consolidated by the Company for each of the three months ended June 30, 2003 and 2002) was 95.5% and 94.3%, for the three months ended June 30, 2003 and 2002, respectively. "Financial occupancy" is defined as the percentage resulting from dividing actual rental revenue by total possible rental revenue. Actual rental revenue represents contractual rental revenue pursuant to leases without considering delinquency and concessions. Total possible rental revenue represents the value of all apartment units, with occupied units valued at contractual rental rates pursuant to leases and vacant units valued at estimated market rents. We believe that financial occupancy is a meaningful measure of occupancy because it considers the value of each vacant unit at its estimated market rate. Financial occupancy rates disclosed by other REITs may not be comparable to our calculation of financial occupancy.

The regional breakdown of average financial occupancy for the multifamily Quarterly Same Store Properties for the three months ended June 30, 2003 and 2002 are as follows:

                                           Three months ended
                                                June 30,
                                          --------------------
                                            2003       2002
                                          ---------  ---------
Southern California                           95.9%      94.4%
Northern California                           95.3%      95.1%
Pacific Northwest                             95.2%      93.0%


19



Total Revenues increased by $7,464,000 or 14.6% to $58,447,000 in the second quarter of 2003 from $50,983,000 in the second quarter of 2002. The following table sets forth a breakdown of these revenue amounts, including the revenues attributable to the Quarterly Same Store Properties.


                                               Three Months Ended
                                                    June 30,
                                   Number of   --------------------   Dollar   Percentage
                                  Properties     2003       2002      Change     Change
                                  -----------  ---------  ---------  --------- -----------
Revenues:
  Property revenues - quarterly
    Quarterly Same Store Properties
      Southern California                 22  $  17,538  $  16,855  $     683         4.1 %
      Northern California                 16     12,841     13,938     (1,097)       (7.9)
      Pacific Northwest                   23     10,214     10,567       (353)       (3.3)
                                  -----------  ---------  ---------  --------- -----------
          Properties                      61     40,593     41,360       (767)       (1.9)
  Property revenues - properties
    acquired subsequent to
    March 31, 2002 (1)                           14,688      1,805     12,883       713.7
                                               ---------  ---------  --------- -----------
      Total property revenues                    55,281     43,165     12,116        28.1
Interest and other income                         3,166      7,818     (4,652)      (59.5)
                                               ---------  ---------  --------- -----------
      Total revenues                          $  58,447  $  50,983  $   7,464        14.6 %
                                               =========  =========  ========= ===========

(1) Also includes four office buildings, five recreational vehicle parks, two manufactured housing communities, redevelopment communities, and development communities.

As set forth in the above table, the $7,464,000 net increase in total revenues was mainly attributable to an increase of $12,883,000 attributable to multifamily properties acquired subsequent to March 31, 2002, four office buildings, five recreational vehicle parks, two manufactured housing communities, redevelopment communities and development communities, which was offset in part by a decrease in interest and other income of $4,652,000 and a decrease in revenues from the Quarterly Same Store Properties of $767,000. Subsequent to March 31, 2002, the Company acquired interests in 21 multifamily properties, two office buildings, five recreational vehicle parks, two manufactured housing communities and achieved stabilized operations in three redevelopment communities and one development community (the "Quarterly Acquisitions Properties").

Interest and other income decreased by $4,652,000 or 59.5% to $3,166,000 in the second quarter of 2003 from $7,818,000 in the second quarter of 2002. The decrease primarily relates to the payoff or conversion to non-accrual of interest on notes receivable resulting in the decrease in interest income on notes receivables and the sale of co-investment assets resulting in the decrease in income earned on the Company's co-investments.

Property revenues from the Quarterly Same Store Properties decreased by $767,000 or 1.9% to $40,593,000 in the second quarter of 2003 from $41,360,000 in the second quarter of 2002. The majority of this decrease was attributable to the 16 Quarterly Same Store Properties located in Northern California and the 23 Quarterly Same Store Properties located in the Pacific Northwest. The property revenues of the Quarterly Same Store Properties in Northern California decreased by $1,097,000 or 7.9% to $12,841,000 in the second quarter of 2003 from $13,938,000 in the second quarter of 2002. The decrease in Northern California is primarily attributable to rental rate decreases offset by an increase in financial occupancy to 95.3% in the second quarter of 2003 from 95.1% in the second quarter of 2002. The property revenues of the Quarterly Same Store Properties in the Pacific Northwest decreased by $353,000 or 3.3% to $10,214,000 in the second quarter of 2003 from $10,567,000 in the second quarter of 2002. The $353,000 decrease in the Pacific Northwest is primarily attributable to rental rate decreases offset by an increase in financial occupancy to 95.2% in the second quarter of 2003 from 93.0% in the second quarter of 2002. The 22 Quarterly Same Store Properties located in Southern California offset the net decrease in total property revenues from the other Quarterly Same Store Properties. The property revenues for these properties increased by $683,000 or 4.1% to $17,538,000 in the second quarter of 2003 from $16,855,000 in the second quarter of 2002. The $683,000 increase is primarily attributable to rental rate increases and an increase in financial occupancy to 95.9% in the second quarter of 2003 from 94.4% in the second quarter of 2002.


20



Total Expenses increased by $10,578,000 or approximately 33.6% to $42,051,000 in the second quarter of 2003 from $31,473,000 in the second quarter of 2002. This increase was mainly due to an increase in interest expense of $1,879,000 or 21.7% to $10,531,000 in the second quarter of 2003 from $8,652,000 in the second quarter of 2002. The increase in interest expense is due to increases in the mortgage notes payable and line of credit balances. Property operating expenses increased by $8,401,000 or 39.8% to $29,510,000 in the second quarter of 2003 from $21,109,000 in the second quarter of 2002. Of such operating expense increase $8,152,000 was attributable to the Quarterly Acquisition Properties.

Discontinued operations decreased by $8,133,000 to $0 in the second quarter of 2003 from $8,133,000 in the second quarter in 2002. This decrease is due to the reduction of gain on sale of real estate and operating income from Tara Village, a 168-unit apartment community located in Tarzana, California, which was sold on June 18, 2002.

Minority interests decreased by $539,000 or 8.6% to $5,746,000 in the second quarter of 2003 from $6,285,000 in the second quarter of 2002. This is primarily due to the decrease in net income of the Operating Partnership.

Net income decreased by $10,708,000 or 50.1% to $10,650,000 in the second quarter of 2003 from $21,358,000 in the second quarter of 2002. The decrease in net income is mainly attributable to the factors noted above.

Comparison of the Six Months Ended June 30, 2003 to the Six Months Ended June 30, 2002

Average financial occupancy rates of the Company's multifamily Same Store Properties (stabilized properties consolidated by the Company for each of the six months ended June 30, 2003 and 2002) was 95.4% and 93.5%, for the six months ended June 30, 2003 and 2002, respectively.

The regional breakdown of average financial occupancy for the multifamily Same Store Properties for the six months ended June 30, 2003 and 2002 are as follows:

                                            Six Months Ended
                                                June 30,
                                          --------------------
                                            2003       2002
                                          ---------  ---------
Southern California                           95.5%      93.2%
Northern California                           95.6%      95.1%
Pacific Northwest                             94.8%      91.9%


21



Total Revenues increased by $17,047,000 or 17.0% to $117,442,000 in the six months ended June 30, 2003 from $100,395,000 in the six months ended June 30, 2002. The following table sets forth a breakdown of these revenue amounts, including the revenues attributable to the Same Store Properties.


                                                 Six Months Ended
                                                     June 30,
                                   Number of   --------------------   Dollar   Percentage
                                  Properties     2003       2002      Change     Change
                                  -----------  ---------  ---------  --------- -----------
Revenues:
  Property revenues
  Same Store Properties
    Southern California                   22  $  35,008  $  33,149  $   1,859         5.6 %
    Northern California                   16     25,992     28,576     (2,584)       (9.0)
    Pacific Northwest                     23     20,535     21,212       (677)       (3.2)
                                  -----------  ---------  ---------  --------- -----------
          Properties                      61     81,535     82,937     (1,402)       (1.7)
  Property revenues - properties
    acquired subsequent to
    December 31, 2001 (1)                        29,642      3,663     25,979       709.2
                                               ---------  ---------  --------- -----------
      Total property revenues                   111,177     86,600     24,577        28.4
Interest and other income                         6,265     13,795     (7,530)      (54.6)
                                               ---------  ---------  --------- -----------
      Total revenues                          $ 117,442  $ 100,395  $  17,047        17.0 %
                                               =========  =========  ========= ===========

(1) Also includes four office buildings, five recreational vehicle parks, two manufactured housing communities, redevelopment communities, and development communities.

As set forth in the above table, the $17,047,000 net increase in total revenues was mainly attributable to an increase of $25,979,000 attributable to multifamily properties acquired subsequent to December 31, 2001, four office buildings, five recreational vehicle parks, two manufactured housing communities, redevelopment communities and development communities, which was offset in part by a decrease in interest and other income of $7,530,000 and a decrease in revenue from the Same Store Properties of $1,402,000. Subsequent to December 31, 2001, the Company acquired interests in 21 multifamily properties, two office buildings, five recreational vehicle parks, two manufactured housing communities and achieved stabilized operations in three redevelopment communities and one development community (the "Acquisitions Properties").

Interest and other income decreased by $7,530,000 or 54.6% to $6,265,000 in the six months ended June 30, 2003 from $13,795,000 in the six months ended June 30, 2002. The decrease primarily relates to the payoff or conversion to non- accrual of interest on notes receivable resulting in the decrease in interest income on notes receivables and the sale of co-investment assets resulting in the decrease in income earned on the Company's co-investments.

Property revenues from the Same Store Properties decreased by $1,402,000 or 1.7% to $81,535,000 in the six months ended June 30, 2003 from $82,937,000 in the six months ended June 30, 2002. The majority of this decrease was attributable to the 16 Same Store Properties located in Northern California and the 23 Same Store Properties located in the Pacific Northwest. The property revenues of the Same Store Properties in Northern California decreased by $2,584,000 or 9.0% to $25,992,000 in the six months ended June 30, 2003 from $28,576,000 in the six months ended June 30, 2002. The decrease in Northern California is primarily attributable to rental rate decreases offset by an increase in financial occupancy to 95.6% in the six months ended June 30, 2003 from 95.1% in the six months ended June 30, 2002. The property revenues of the Same Store Properties in the Pacific Northwest decreased by $677,000 or 3.2% to $20,535,000 in the six months ended June 30, 2003 from $21,212,000 in the six months ended June 30, 2002. The $677,000 decrease in the Pacific Northwest is primarily attributable to rental rate decreases offset by an increase in financial occupancy to 94.8% in the six months ended June 30, 2003 from 91.9% in the six months ended June 30, 2002. The 22 multifamily residential properties located in Southern California offset the net decrease in total property revenues from the other Same Store Properties. The property revenues for these properties increased by $1,859,000 or 5.6% to $35,008,000 in the six months ended June 30, 2003 from $33,149,000 in the six months ended June 30, 2002. The $1,859,000 increase is primarily attributable to rental rate increases and an increase in financial occupancy to 95.5% in the six months ended June 30, 2003 from 93.2% in the six months ended June 30, 2002.


22



Total Expenses increased by $21,241,000 or approximately 33.4% to $84,918,000 in the six months ended June 30, 2003 from $63,677,000 in the six months ended June 30, 2002. This increase was mainly due to an increase in interest expense $3,889,000 or 22.3% to $21,330,000 in the six months ended June 30, 2003 from $17,441,000 in the six months ended June 30, 2002. The increase in interest expense is due to increases in the mortgage notes payable and line of credit balances. Property operating expenses increased by $16,890,000 or 39.6% to $59,566,000 in the six months ended June 30, 2003 from $42,676,000 in the six months ended June 30, 2002. Of such operating expense increase $15,813,000 was attributable to the Acquisition Properties.

Discontinued operations decreased by $8,286,000 to $0 in the six months ended June 30, 2003 from $8,286,000 in the six months ended June 30, 2002. This decrease is due to the reduction of gain on sale of real estate and operating income from Tara Village, a 168-unit apartment community located in Tarzana, California, which was sold on June 18, 2002.

Minority interests decreased by $706,000 or 5.7% to $11,643,000 in the six months ended June 30, 2003 from $12,349,000 in the six months ended June 30, 2002. This is primarily due to the decrease in net income of the Operating Partnership.

Net income decreased by $11,774,000 or 36.1% to $20,881,000 in the six months ended June 30, 2003 from $32,655,000 in six months ended June 30, 2002. The decrease in net income is mainly attributable to the factors noted above.

Liquidity and Capital Resources

At June 30, 2003, the Company had $8,854,000 of unrestricted cash and cash equivalents. The Company expects to meet its short-term liquidity requirements by using its working capital, cash generated from operations, and amounts available under lines of credit or other financings. The Company believes that its current net cash flows will be adequate to meet operating requirements and to provide for payment of dividends by the Company in accordance with REIT qualification requirements. The Company expects to meet its long-term liquidity requirements relating to property acquisitions and development (beyond the next 12 months) and balloon debt maturities by using a combination of some or all of the following sources: working capital, amounts available on lines of credit, net proceeds from public and private debt and equity issuances, and proceeds from the disposition of properties that may be sold from time to time. There can, however, be no assurance that the Company will have access to the debt and equity markets in a timely fashion to meet such future funding requirements or that future working capital and borrowings under the lines of credit will be available, or if available, will be sufficient to meet the Company's requirements or that the Company will be able to dispose of properties in a timely manner and under terms and conditions that the Company deems acceptable.

The Company has two outstanding unsecured lines of credit for an aggregate amount of $195,000,000. The first line, in the amount of $165,000,000, matures in May 2004, with an option to extend it for one year thereafter. Outstanding balances under this line of credit bear interest at a rate, which uses a tiered rate structure tied to the Company's corporate ratings, if any, and leverage rating, which has been priced at LIBOR plus 1.10%. At June 30, 2003 the Company had $135,000,000 outstanding on this line of credit. In July, 2003 the Company expanded this line to $185,000,000. No other terms of this facility were revised. A second line of credit in the amount of $30,000,000 matures in December 2003. Outstanding balances, if any, on this second line bear interest based on a tiered rate structure currently at LIBOR plus 1.10%. At June 30, 2003 the Company had $30,000,000 outstanding on this line of credit. At June 30, 2003, these lines of credit bore interest rates of approximately 2.5%. The credit agreements contain debt covenants related to limitations on indebtedness and liabilities, maintenance of minimum levels of consolidated earnings before depreciation, interest and amortization and maintenance of minimum tangible net worth.

In addition, the Fund, the investment fund managed by the Company, has an unsecured line of credit for an aggregate amount of $125,000,000. This line matures in December 2003. The line bears interest at LIBOR plus 0.875%. As of June 30, 2003, the line had an outstanding balance of $102,950,000. The line provides for debt covenants relating to limitations on mortgage indebtedness.


23



In addition to the Company's unsecured lines of credit, the Company had $662,712,000 of secured indebtedness at June 30, 2003. Such indebtedness consisted of $596,650,000 in fixed rate debt with interest rates varying from 5.5% to 8.2% and maturity dates ranging from 2005 to 2026. The indebtedness also includes $66,062,000 of tax-exempt variable rate demand bonds with interest rates paid during the six months ended June 30, 2003 which averaged 2.7% and maturity dates ranging from 2020 to 2032. The tax-exempt variable rate demand bonds are capped at interest rates ranging from 7.1% to 7.3%.

The Company's unrestricted cash balance increased by $292,000 from $8,562,000 as of December 31,2002 to $8,854,000 as of June 30, 2003. The Company generated $50,100,000 in cash from operating activities, used $31,671,000 cash in investing activities and used $18,137,000 cash in financing activities. The $31,671,000 net cash used in investing activities was primarily a result of $13,399,000 used to fund real estate under development, $7,296,000 used to upgrade rental properties and $5,962,000 used in additions to notes receivables from investees, other related parties and other receivables. The $18,137,000 net cash used in financing activities was primarily a result of $32,993,000 of dividends paid, $25,491,000 of repayments of mortgages and other notes payable and lines of credit, $10,140,000 of distributions to minority interest partners offset by $49,140,000 of proceeds from mortgages and other notes and line of credit.

Non-revenue generating capital expenditures are improvements and upgrades that extend the useful life of the property and are not related to preparing a multifamily property unit to be rented to a tenant. The Company expects to incur approximately $375 per weighted average occupancy unit in non-revenue generating capital expenditures for the year ended December 31, 2003. These expenditures do not include the improvements required in connection with the origination of mortgage loans, expenditures for acquisition properties' renovations and improvements, which are expected to generate additional revenue, and renovation expenditures required pursuant to tax-exempt bond financings. The Company expects that cash from operations and/or its lines of credit will fund such expenditures. However, there can be no assurance that the actual expenditures incurred during 2003 and/or the funding thereof will not be significantly different than the Company's current expectations.

The Company is currently developing six multifamily residential projects, with an aggregate of 1,368 multifamily units. Such projects involve certain risks inherent in real estate development. See "Other Matters/ Risk Factors-- Risks that Development Activities Will be Delayed or Not Completed and/or Fail to Achieve Expected Results" in Item 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2002. In connection with these development projects, the Company has directly, or in some cases through its joint venture partners entered into contractual construction related commitments with unrelated third parties and the total projected estimated cost for these projects is approximately $246,300,000. As of June 30, 2003, the remaining commitment to fund these development projects is approximately $107,700,000, of which approximately $49,300,000 is the Company's commitment. The Company expects to fund such commitments by using a combination of some or all of the following sources: its working capital, amounts available on its lines of credit, net proceeds from public and private equity and debt issuances, and proceeds from the disposition of properties, if any.

Pursuant to existing shelf registration statements, the Company has the capacity to issue up to $342,000,000 of equity securities and the Operating Partnership has the capacity to issue up to $250,000,000 of debt securities.

The Company pays quarterly dividends from cash available for distribution. Until it is distributed, cash available for distribution is invested by the Company primarily in short-term investment grade securities or is used by the Company to reduce balances outstanding under its line of credit.

Essex Apartment Value Fund, L.P. (the "Fund"), is an investment fund organized by the Company in 2001. The Fund will be, subject to specific exceptions, the Company's exclusive investment vehicle for new investments until the Fund's committed capital has been invested or committed for investments, or if earlier, December 31, 2003. The Fund has total capital commitments of $250 million and is expected to utilize leverage of approximately 65% of the value of the underlying real estate portfolio. The Company is committed to invest 21.4% of the aggregate capital committed to the Fund. In addition, Essex will be compensated by the Fund for its asset management, property management, development and redevelopment services and may receive incentive distributions if the Fund exceeds certain financial return benchmarks. At June 30, 2003 the Fund was approximately 90% invested.


24



Contractual Obligations and Commercial Commitments

The following table summarizes our contractual obligations and other commitments at June 30, 2003, and the effect such obligations could have on our liquidity and cash flow in future periods:


                                Less Than     2-3        4-5       Over 5
                                 1 Year      Years      Years      Years      Total
(In thousands)                  ---------  ---------  ---------  ---------  ---------
Mortgage notes payable         $   3,315  $  48,904  $  83,527  $ 526,966  $ 662,712
Lines of credit                   30,000    135,000         --         --    165,000
Development commitments(1)        49,300         --         --         --     49,300
Redevelopment commitments(2)       3,500         --         --         --      3,500
Essex Apartment Value Fund, L.P.
   capital commitment             35,615         --         --         --     35,615
                                ---------  ---------  ---------  ---------  ---------
                               $ 121,730  $ 183,904  $  83,527  $ 526,966  $ 916,127
                                =========  =========  =========  =========  =========
    1. $28,731 of these commitments relate to actual contracts as of June 30, 2003.
    2. $1,016 of these commitments relate to actual contracts as of June 30, 2003.

New Accounting Pronouncements

In January 2003, the FASB approved for issuance FASB Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities." FIN 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements" to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. FIN 46 may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. The disclosure requirements of FIN 46 are effective for all financial statements initially issued after January 31, 2003. It is reasonably possible that certain of the entities through which and with which the Company conducts business, including those described in Notes 3(b) and 5 of the Company's December 31, 2002 consolidated financial statements will be deemed to be Variable Interest Entities (VIEs) under the provisions of FIN 46. The total assets and liabilities net of intercompany balances of such entities were estimated at $77,216 and $47,098 at June 30, 2003. The Company's estimated maximum exposure to loss would be equal to its investments in these arrangements, which totaled $30,485, as of June 30, 2003. The disclosures provided reflect management's understanding and analysis of FIN 46 based upon information currently available. The evaluation of the Company's various arrangements is ongoing and is subject to change in the event additional interpretive guidance is provided by the Financial Accounting Standards Board or others.

In May 2003, the FASB issued Statement of Financial Accounting Standard No. 150 ("FAS 150"), "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." FAS 150 requires issuers to classify as liabilities (or assets in some circumstances) three classes of freestanding financial instruments that embody obligations for the issuer. Previously, many such instruments had been classified as equity. A freestanding financial instrument is an instrument that is entered into separately and apart from any of the entity's other financial instruments or equity transactions, or that is entered into in conjunction with some other transaction and is legally detachable and separately exercisable, such as certain put and call options. These provisions are effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company is currently evaluating the impact of FAS 150.


25



Forward Looking Statements

Certain statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this quarterly report on Form 10-Q which are not historical facts may be considered forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, including statements regarding the Company's expectations, hopes, intentions, beliefs and strategies regarding the future. Forward looking statements include statements regarding the Company's expectations as to the timing of completion of current development projects and the stabilization dates of such projects, expectation as to the total projected costs and rental rates of current development projects, beliefs as to the adequacy of future cash flows to meet operating requirements and to provide for dividend payments in accordance with REIT requirements, expectations as to the amount of capital expenditures, expectations as to the amount of non-revenue generating capital expenditures, future acquisitions and developments, the anticipated performance of the Essex Apartment Value Fund, L.P., the anticipated performance of existing properties, and statements regarding the Company's financing activities. Such forward-looking statements involve known and unknown risks, uncertainties and other factors including, but not limited to, that the Company will fail to achieve its business objectives, that the actual completion of development projects will be subject to delays, that the stabilization dates of such projects will be delayed, that the total projected costs of current development projects will exceed expectations, that such development projects will not be completed, that development projects and acquisitions will fail to meet expectations, that estimates of future income from an acquired property may prove to be inaccurate, that future cash flows will be inadequate to meet operating requirements and/or will be insufficient to provide for dividend payments in accordance with REIT requirements, that the actual non-revenue generating capital expenditures will exceed the Company's current expectations, that the Essex Apartment Value Fund will fail to perform as anticipated, that the Company's partners in this Fund fail to fund capital commitments as contractually required, that there may be a downturn in the markets in which the Company's properties are located, and that the terms of any refinancing may not be as favorable as the terms of existing indebtedness, as well as those risks, special considerations, and other factors discussed under the caption "Potential Factors Affecting Operating Results" below and those discussed under the caption "Other Matters/Risk Factors" in Item 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2002, and those other risk factors and special considerations set forth in the Company's other filings with the Securities and Exchange Commission (the "SEC") which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.

Potential Factors Affecting Future Operating Results

Many factors affect the Company's actual financial performance and may cause the Company's future results to be different from past performance or trends. These factors include those factors discussed under the caption "Other Matters/Risk Factors" in Item 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2002 and the following:  

Economic Environment and Impact on Operating Results

Both the national economy and the economies of the western states in which the Company owns, manages and develops properties, some of which are located in high-tech sectors, have been and may continue to be in a recession . The impacts of such recession on operating results can include, and are not limited to, reduction in rental rates, occupancy levels, property valuations and increases in operating costs such as advertising, turnover and repair and maintenance expense.  

The Company's property type and diverse geographic locations provide some degree of risk moderation but are not immune to a prolonged down cycle in the real estate markets in which the Company operates. Although the Company believes it is well positioned to meet the challenges ahead, it is possible that further reductions in occupancy and market rental rates will result in reduction of rental revenues, operating income, cash flows, and market value of the Company's shares. Prolonged recession could also affect the Company's ability to obtain financing at acceptable rates of interest and to access funds from the disposition of properties at acceptable prices.


26



Development and Redevelopment Activities

The Company pursues multifamily residential properties and development and redevelopment projects from time to time. Development projects generally require various government and other approvals, the receipt of which cannot be assured. The Company's development and redevelopment activities generally entail certain risks, including the following:

  • funds may be expended and management's time devoted to projects that may not be completed;
  • construction costs of a project may exceed original estimates possibly making the project economically unfeasible;
  • projects may be delayed due to, among other things, adverse weather conditions;
  • occupancy rates and rents at a completed project may be less than anticipated; and
  • expenses at a completed development project may be higher than anticipated.

These risks may reduce the funds available for distribution to the Company's stockholders. Further, the development and redevelopment of properties is also subject to the general risks associated with real estate investments.

Interest Rate Fluctuations

The Company monitors changes in interest rates and believes that it is well positioned from both a liquidity and interest rate risk perspective. However, current interest rates are at historic lows and potentially could increase rapidly to levels more in line with recent levels. The immediate effect of significant and rapid interest rate increases would result in higher interest expense on the Company's variable interest rate debt. The effect of prolonged interest rate increases could negatively impact the Company's ability to make acquisitions and develop properties at economic returns on investment and the Company's ability to refinance existing borrowings at acceptable rates.

Inflation /Deflation

Substantial inflationary or deflationary pressures would likely have a negative effect on rental rates and property operating expenses. The Company believes it effectively manages its property and other expenses but understands that substantial annual rates of inflation or deflation could adversely impact operating results.


27



Funds from Operations

Funds from Operations, as defined by the National Association of Real Estate Investment Trusts ("NAREIT") is generally considered by industry analysts as an appropriate measure of performance of an equity REIT. Generally, Funds from Operations adjusts the net income of equity REITS for charges such as depreciation and amortization of rental properties, gains/ losses on sales of real estate and extraordinary items. Management considers Funds from Operations to be a useful financial operating performance measurement of an equity REIT because, together with net income and cash flows, Funds from Operations provides investors with an additional basis to evaluate the performance of a REIT. Funds from Operations does not represent net income or cash flows from operations as defined by generally accepted accounting principles (GAAP) and is not intended to indicate whether cash flows will be sufficient to fund cash needs. It should not be considered as an alternative to net income as an indicator of the REIT's operating performance or to cash flows as a measure of liquidity. Funds from Operations also does not represent cash flows generated from operating, investing or financing activities as defined under GAAP. Further, Funds from Operations as disclosed by other REITs may not be comparable to the Company's calculation of Funds from Operations.

The following table sets forth the Company's calculation of Funds from Operations for the three and six months ended June 30, 2003 and 2002.

 


                                                      Three Months Ended            Six Months Ended
                                                           June 30,                      June 30,
                                                 ----------------------------  --------------------------
                                                     2003           2002           2003          2002
                                                 -------------  -------------  ------------  ------------
Income from continuing operations before
  minority intrusts and discontinued
  operations                                    $  16,396,000  $  19,510,000  $ 32,524,000  $ 36,718,000
Adjustments:
    Gain on sale of co-investment activities               --     (1,389,000)                 (1,389,000)
    Depreciation and amortization                  11,556,000      9,114,000    23,165,000    18,100,000
    Depreciation and amortization --
       unconsolidated co-investments                2,236,000      1,891,000     4,408,000     3,722,000
    Minority interests, excluding depreciation     (4,607,000)    (4,618,000)   (9,218,000)   (9,209,000)
    Income from discontinued operations                    --         69,000            --       225,000
    Depreciation - discontinued operations                 --         95,000            --       191,000
                                                 -------------  -------------  ------------  ------------
    Funds From Operations                       $  25,581,000  $  24,672,000  $ 50,879,000  $ 48,358,000
                                                 =============  =============  ============  ============
Weighted average number
  shares outstanding diluted (1)                   23,558,314     21,115,264    23,511,388    21,046,919
                                                 =============  =============  ============  ============


                                                                                    Six Months Ended
                                                                                        June 30,
                                                                               --------------------------
                                                                                   2003          2002
                                                                               ------------  ------------
Cash flow provided by (used in):
     Operating activities                                                     $ 50,100,000  $ 45,359,000
     Investing activities                                                      (31,671,000)  (32,767,000)
     Financing activities                                                      (18,137,000)  (10,368,000)


(1) Assumes conversion of all outstanding operating partnership interests in the Operating Partnership. Minority interests have been adjusted to reflect such conversion.


28



Item 3: Quantitative andQualitative Disclosures About Market Risk

The Company is exposed to interest rate changes primarily as a result of its line of credit and long-term debt used to maintain liquidity and fund capital expenditures and expansion of the Company's real estate investment portfolio and operations. The Company's interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives the Company borrows primarily at fixed rates and may enter into derivative financial instruments such as interest rate swaps, caps and treasury locks in order to mitigate its interest rate risk on a related financial instrument. The Company does not enter into derivative or interest rate transactions for speculative purposes.

The Company's interest rate risk is monitored using a variety of techniques. The table below presents the principal amounts and weighted average interest rates by year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes.


For the Years Ended           2003      2004      2005       2006      2007    Thereafter        Total     Fair value
                            --------  --------  ---------  --------  --------  -----------     ---------   ---------
Fixed rate debt
   (In thousands)
Amount                     $  3,315  $  7,901  $  41,003  $ 20,397  $ 63,130  $   460,904     $ 596,650   $ 576,894
Average interest rate           6.9%      6.9%       6.9%      6.9%      6.9%         6.8%

Variable rate debt
   (In thousands)
Amount                     $ 30,000  $135,000  $      --  $     --  $     --  $    66,062 (1) $ 231,062   $ 231,062
Average interest                2.7%      2.5%        --        --        --          3.0%

(1) Capped at interest rates ranging from 7.1% to 7.3%.

The table incorporates only those exposures that exist as of June 30, 2003; it does not consider those exposures or positions that could arise after that date. As a result, our ultimate realized gain or loss, with respect to interest rate fluctuations, would depend on the exposures that arise during the period, our hedging strategies at the time, and interest rates.

Item 4: Controls and Procedures

As of June 30, 2003, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15 of the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting management to material information relating to the Company that is required to be included in our periodic filings with the Securities and Exchange Commission. There were no changes in the Company's internal control over financial reporting, that occurred during the quarter ended June 30, 2003, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.


29



Part II -- Other Information

Item 4: Submission of Matters to a Vote of Security Holders

At the Company's annual meeting, held on May 13, 2003 in Menlo Park, California, the following votes of security holders occurred:

    1. The following persons were duly elected by the stockholders of the Company as Class III directors of the Company, each for a three (3) year term (until 2006) and until their successors are elected and qualified:
      1. George M. Marcus, 16,871,008 votes for and 1,115,899 votes withheld;
      2. Gary P. Martin, 17,726,250 votes for and 260,657 votes withheld; and
      3. William A. Millichap, 17,731,778 votes for and 255,129 votes withheld.
    2. The stockholders ratified the appointment of KPMG LLP as the Company's independent public auditors for the year ended December 31, 2003 by a vote of 17,540,494 for, 432,397 votes against and 14,014 votes abstaining.

Item 6: Exhibits and Reports on Form 8-K

  1. Exhibits
  2. 10.1 Seventh Amendment to the First Amended and restated Agreement of Limited Partnership of Essex Portfolio, L.P. *

    31.1 Certification of Keith R. Guericke, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

    31.2 Certification of Michael J. Schall, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

    32.1 Certification of Keith R. Guericke, Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

    32.2 Certification of Michael J. Schall, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

    __________

    * Management contract or compensatory plan or agreements.

     

  3. Reports on Form 8-K

On May 1, 2003 the Company filed a Current Report on Form 8-K to file a press release to announce first quarter 2003 results.

On June 2, 2003 the Company filed a Current Report on Form 8-K to file a written communication comprised of slides shown during an investor presentation on June 3, 2003.


30



SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ESSEX PROPERTY TRUST, INC.
(Registrant)

August 13, 2003

By: /s/ MARK J. MIKL

Mark J. Mikl
First Vice President, Treasurer and Controller
(Authorized Officer and Principal Accounting Officer)


31



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M%E4(HJ2VC(,11"G8;@`@2FJ;R1X0);7-9`E$26TSN!!$26VM5($HJ6WV#`!1 M"K8[`(A2L%T#0)34UB?I`41);1G70+"5P;O(P6!.JI_CZ`QS5GV+@S'T.=P^ M,F5$P2$/E&5$P>'V,P!$P9J'Q54RHF#-@R''B((UCUQF(`K6/%*I@BA8\\C@ MPHB"-0\K`%&PYI%+643!F@>+"Z)@S8/QMV1$P:I/(@=S5GU&R!;F5FU3R%F( M6K6UV-1"U(;;1UG+H96PJ0>^H_ZV#IH+GXC/OJUNT^1;6KXCTLWHT;9WGY^: M<1C1DOBM_@@P`)"3'RD*96YD3?5V]G M6^BIAXCXLV9WW]OQS&_N;^^'_ASFW\=#NTGGL.N';DRGP]O8IK!-+_T0EE7H M^O9'N\>+I_[?3H] MIE]/AWTS;(ZI[9O7+\O+Q8R'EW#QK-6/GU.R>3L>7],^#>>P".MU MZ-)N-K_YVAP?FWT*\_\LF5]?EO,=NG0Z-FT:F^$EA56U7(=5O%Z'-'3_?C>K M2\EVYY_]W?Q8+*Q:3T%%4.4@&H$0B`=+`B50#VX(C,!R4"T((D&=@UH(K@BN M,E>8TMP=:#?+"6H/62.X*.H//@FB`1I!QH/MB.8.=O MZ!3(8OH_/Z;@E@!R\ M+2K,?5@.4&'%!]M&5,3B@S=BGB3NHP(_HB*Z#^,:(BIBF0YY#53$TA]<0T1% M+/V12U`1BP_N-J(B%A_01E1$]V%Y451$]S%=SVP:;'\F&#..^?QW7!E("]086=E7!E("]086=E EX-10.1 5 exh10-1.htm EX-10.1 10-Q Exhibit 10.1

Exhibit 10.1

SEVENTH AMENDMENT TO THE
FIRST AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP OF
ESSEX PORTFOLIO, L.P.

Dated as of June 26, 2003

This Seventh Amendment to the First Amended and Restated Agreement of Limited Partnership of Essex Portfolio, L.P., as amended (as amended, the "Partnership Agreement"), dated as of the date shown above (the "Amendment"), is executed by Essex Property Trust, Inc., a Maryland corporation (the "General Partner"), as the General Partner and on behalf of the existing Limited Partners of Essex Portfolio, L.P. (the "Partnership") and any individuals to whom Series Z-1 Incentive Units are issued and who are admitted as Additional Limited Partners on or after the date of this Amendment in accordance with the terms of the Partnership Agreement and this Amendment and whose names will be set forth on Exhibit R as holders of Series Z-1 Incentive Units issued pursuant to this Amendment (the "Series Z-1 Partners").

RECITALS

WHEREAS, the Partnership was formed pursuant to the Partnership Agreement;

WHEREAS, the Partnership desires to authorize the issuance as of the date hereof an aggregate amount of 400,000 Series Z-1 Incentive Units (the "Series Z-1 Incentive Units") of limited partnership interests in the Partnership with rights, terms and conditions as set forth herein, which will be issued from time to time to the Series Z-1 Partners in exchange for a capital commitment (the "Capital Commitment") in the amount of $1.00 per unit;

WHEREAS, pursuant to the authority granted to the General Partner under the Partnership Agreement, the General Partner desires to amend the Partnership Agreement (i) to allow the Partnership to issue the Series Z-1 Incentive Units to the Series Z-1 Partners on or after the date of this Amendment and to admit the Series Z-1 Partners as Additional Limited Partners and holders of Series Z-1 Incentive Units on or after the date of this Amendment and (ii) certain other matters described herein; and

WHEREAS, upon the issuance of Series Z-1 Incentive Units to an individual, he or she agrees to become a party to the Partnership Agreement as an Additional Limited Partner and a Series Z-1 Partner by executing a counterpart signature page to this Amendment and otherwise complying with the terms of this Amendment and the Partnership Agreement, and agrees to be bound by all terms, conditions and other provisions of this Amendment and the Partnership Agreement.

NOW THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the General Partner hereby amends the Partnership Agreement as follows:


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    1. Definitions. Capitalized terms used herein, unless otherwise defined herein, shall have the same meanings as set forth in the Partnership Agreement.
    2. Amended Definitions.
      1. Section 1.1 of the Partnership Agreement is hereby amended to delete the definition of "Percentage Interest" in its entirety and to substitute the following definition of "Percentage Interest," in its place:
      2. "Percentage Interest" shall mean (i) with respect to any Partner other than holders of Series B Preferred Units, Series C Preferred Units, Series D Preferred Units, Series E Preferred Units, Series Z Incentive Units or Series Z-1 Incentive Units, the undivided percentage ownership interest of such Partner in the Partnership, as determined by dividing (A) the number of Partnership Units owned by such Partner by (B) the sum of (x) the total number of Partnership Units then outstanding (excluding the Series A Preferred Interest, the Series B Preferred Interest, the Series B Partnership Units, the Series C Preferred Interest, the Series C Preferred Units, the Series D Preferred Interest, the Series D Preferred Units, the Series E Preferred Interest, the Series E Preferred Units, Series Z Incentive Units and the Series Z-1 Incentive Units), (y) the total number of outstanding Series Z Incentive Units multiplied by the Distribution Ratchet Percentage with respect to each such Series Z Incentive Unit, calculated on a unit-by-unit basis, and (z) the total number of outstanding Series Z-1 Incentive Units multiplied by the Series Z-1 Distribution Ratchet Percentage with respect to each such Series Z-1 Incentive Unit, calculated on a unit-by-unit basis. With respect to any holder of Series Z Incentive Units, such Partner's Percentage Interest shall be equal to such Partner's Series Z Percentage Interest. With respect to any holder of Series Z-1 Incentive Units, such Partner's Percentage Interest shall be equal to such Partner's Series Z-1 Percentage Interest. If any Partner holds a combination of Common Units, Series Z Incentive Units and/or Series Z-1 Incentive Units, then such Partner's Percentage Interest shall be equal to the sum of (x) the Percentage Interest as calculated pursuant to the first sentence of this definition (assuming for purposes of such calculation that such Partner holds only Common Units, if any), (y) the Series Z Percentage Interest (assuming for purposes of such calculation that such Partner holds only Series Z Incentive Units, if any) and (z) the Series Z-1 Percentage Interest (assuming for purposes of such calculation that such Partner holds only Series Z-1 Incentive Units, if any).

      3. Section 1.1 of the Partnership Agreement is hereby amended to delete the definition of "Common Equivalent Shares" in its entirety and to substitute the following definition of "Common Equivalent Shares," in its place:
      4. "Common Equivalent Shares" shall mean the total number of shares of Common Stock outstanding on a fully diluted basis, calculated in a manner consistent with the manner used by the General Partner for reporting diluted earnings or loss per share under generally accepted accounting principles, it being understood that, to the extent that the General Partner discloses diluted earnings or loss per share in any of its periodic reports publicly filed with the Securities and Exchange Commission, Common Equivalent Shares for such period for the purposes of this Amendment shall be calculated in a manner consistent with such public disclosure.


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      5. Section 1.1 of the Partnership Agreement is hereby amended to delete the definition of "Common Unit" in its entirety and to substitute the following definition of "Common Unit," in its place:
      6. "Common Unit" shall mean a Partnership Unit representing an interest in the Partnership, other than a Series A Preferred Interest, Series B Preferred Unit, Series B Preferred Interest, Series C Preferred Unit, Series C Preferred Interest, Series D Preferred Unit, Series D Preferred Interest, Series E Preferred Unit, Series E Preferred Interest, Series Z Incentive Unit, Series Z-1 Incentive Unit or any other Preferred Interest or Preferred Partnership Units.

      7. Section 1.1 of the Partnership Agreement is hereby amended to delete the definition of "Compensation Committee" in its entirety and to substitute the following definition of "Compensation Committee," in its place:
      8. "Compensation Committee" shall mean the Compensation Committee of the Board of Directors of the General Partner or, if no such committee exists, the full Board of Directors of the General Partner.

      9. Section 1.1 of the Partnership Agreement is hereby amended to delete the definitions of "Net Operating Income," "Net Operating Loss," "Net Property Gain," "Net Property Loss," "Actual FFO," and "Actual FFO Per Share," in their entirety and to substitute the following definitions in their place:

      "Net Operating Income" shall mean, for any fiscal year or portion thereof, the excess of the items of income and gain over the items of deduction and loss, excluding, in each case, items of gain or loss realized in connection with the sale or disposition of real property and other capital assets.

      "Net Operating Loss" shall mean, for any fiscal year or portion thereof, the excess of the items of deduction and loss over the items of income and gain, excluding, in each case, items of gain or loss realized in connection with the sale or disposition of real property and other capital assets.

      "Net Property Gain" shall mean, for any fiscal year or portion thereof, the excess of gains realized from the sale or disposition of real property and other capital assets over the losses realized in connection with the sale or disposition of real property and other capital assets.

      "Net Property Loss" shall mean, for any fiscal year or portion thereof, the excess of losses realized from the sale or disposition of real property and other capital assets over the gains realized in connection with the sale or disposition of real property and other capital assets.


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      "Actual FFO" shall mean with respect to any fiscal period "funds from operations" of the General Partner as determined with respect to such fiscal period by the Board of Directors of the General Partner using a consistently applied methodology that conforms with the standards for computation of "funds from operations" established by the National Association of Real Estate Investment Trusts, Inc. (or successor organizations) from time to time; it being understood that, to the extent that the General Partner discloses "funds from operations" for any fiscal period in any of its periodic reports publicly fled with the Securities and Exchange Commission, Actual FFO for such fiscal period for the purposes of this Agreement will conform to such publicly disclosed "funds from operations."

      "Actual FFO Per Share" shall mean with respect to any fiscal period the Actual FFO for such period divided by the number of Common Equivalent Shares.

    3. Definitions. Section 1.1 of the Partnership Agreement is hereby amended to include the following definitions, to be inserted in alphabetical order in such Section 1.1:
    4. "Series Z Percentage Interest" shall mean, with respect to any holder of Series Z Incentive Units, the undivided percentage ownership interest of such Partner in the Partnership as determined by dividing (A) the product resulting from multiplying the total number of outstanding Series Z Incentive Units owned by such Partner by the Series Z Distribution Ratchet Percentage attributed to such holder's Series Z Incentive Units, by (B) the sum of (x) the total number of Partnership Units then outstanding (excluding the Series A Preferred Interest, the Series B Preferred Interest, the Series B Partnership Units, the Series C Preferred Interest, the Series C Partnership Units, the Series D Preferred Interest, the Series D Preferred Units, the Series E Preferred Interest, the Series E Partnership Units, the Series Z Incentive Units and the Series Z-1 Incentive Units), (y) the total number of outstanding Series Z Incentive Units multiplied by the Distribution Ratchet Percentage with respect to each Series Z Incentive Unit, calculated on a unit-by-unit basis, and (z) the total number of outstanding Series Z-1 Incentive Units multiplied by the Series Z-1 Distribution Ratchet Percentage with respect to each such Series Z-1 Incentive Unit, calculated on a unit-by-unit basis.

      "Series Z-1 Change in Control" shall mean the earliest to occur of any of the following:

      (i) any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than any trustee, fiduciary or other person or entity holding securities under any employee benefit plan or trust of any of the General Partner or any of its subsidiaries or affiliates), together with all "affiliates" and "associates" (as such terms are defined in Rule 12b-2 under the Exchange Act) of such person, shall become the "beneficial owner" (as such term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the General Partner representing thirty percent (30%) or more of the combined voting power of the General Partner's then outstanding securities having the right to vote in an election of the General Partner's Board of Directors ("Voting Securities") (other than as a result of an acquisition of securities directly from the General Partner). Notwithstanding the foregoing, a "Series Z-1 Change in Control" shall not be deemed to have occurred for purposes of this clause (i) solely as the result of an acquisition of securities by the General Partner which, by reducing the number of shares of Voting Securities outstanding, increases the proportionate number of shares of Voting Securities beneficially owned by any person (as defined in the foregoing clause) to thirty percent (30%) or more of the combined voting power of all then outstanding Voting Securities; provided, however, that if such person shall thereafter become the beneficial owner of any additional shares of Voting Securities (other than pursuant to a stock split, stock dividend, or similar transaction or as a result of an acquisition of securities directly from the General Partner) and immediately thereafter beneficially owns thirty percent (30%) or more of the combined voting power of all then outstanding Voting Securities, then a "Series Z-1 Change in Control" shall be deemed to have occurred for purposes of this clause (i).


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      (ii) the moment immediately prior to the consummation of a merger, reorganization or consolidation of the General Partner or the occurrence of any other event (including without limitation a tender or exchange offer), the result of which is that the "beneficial owners" (as such term is defined in Rule 13d-3 of the Exchange Act) of the Voting Securities of the General Partner before the merger, reorganization, consolidation or other transaction are not the "beneficial owners", directly or indirectly, of a majority of the voting power of the surviving or resulting entity upon completion of such merger, reorganization, consolidation or other transaction;

      (iii) the moment immediately prior to the consummation of a merger, reorganization or consolidation of the Partnership, unless the General Partner immediately prior to such merger, reorganization or consolidation remains the sole general partner of the Partnership after such merger;

      (iv) the moment immediately prior to the consummation of a change (whether by removal, withdrawal, transfer or otherwise) in the General Partner of the Partnership;

      (v) persons who, as of the date of issuance of the first Series Z-1 Incentive Unit, constitute the General Partner's Board of Directors (the "Incumbent Directors") cease for any reason, including, without limitation, as a result of a tender or exchange offer, proxy contest, merger or similar transaction, to constitute at least a majority of the Board of Directors of the General Partner (rounded up to the next whole number), provided that any person becoming a director of the General Partner subsequent to such date shall be considered an Incumbent Director if such person's election was approved by, or such person was nominated for election by, a vote of a majority of the Incumbent Directors; provided, however, that any person whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of members of the Board of Directors or other actual or threatened solicitation of proxies or consents by, or on behalf of, a "person" other than the Board of Directors, including by reason of agreement intended to avoid or settle any such actual or threatened contest or solicitation, shall not be considered an Incumbent Director; or


      5



      (vi) the moment immediately prior to the consummation of a sale of all or substantially all of the assets of the General Partner and/or the Partnership.

      "Series Z-1 Clawback Amount" shall mean, at any time with respect to each Series Z-1 Incentive Unit, an amount equal to the positive difference, if any, between (i) the then unpaid Capital Commitment with respect to such Series Z-1 Incentive Unit, and (ii) the sum of any distributions deemed to offset the Series Z-1 Clawback Amount in accordance with Section 6 below. The unpaid Capital Commitment of a Series Z-1 Partner with respect to a Series Z-1 Incentive Unit shall never be greater than the Series Z-1 Clawback Amount with respect to such Series Z-1 Incentive Unit, as adjusted from time to time.

      "Series Z-1 Conversion Ratchet Percentage" with respect to any Series Z-1 Incentive Unit (i) shall equal 0% on the date of issuance of such Series Z-1 Incentive Unit, (ii) shall increase by twenty (20) percentage points on January 1 of the first calendar year after the date of issuance of such Series Z-1 Incentive Unit, on which (x) the holder of such Series Z-1 Incentive Unit is an employee of the General Partner and/or the Partnership and/or any subsidiary or affiliate thereof as of such January 1, (y) the Actual FFO Per Share of the General Partner for the calendar year preceding such January 1 is greater than or equal to the Series Z- 1 Target FFO for such year, and (z) the Series Z-1 Conversion Ratchet Percentage prior to such increase is less than 100%, and (iii) shall increase ten (10) percentage points on January 1 of every calendar year thereafter on which the conditions in clauses (x), (y) and (z) of the immediately preceding clause (ii) are met; provided, however, that if the Compensation Committee determines that Actual FFO Per Share is no longer an appropriate corporate performance parameter for establishing management objectives or that the applicable target levels are no longer feasible in light of factors or circumstances outside of the Partnership's or the General Partner's control (such as general economic conditions, legal/regulatory changes, war or similar events), it may, in its reasonable good faith discretion without any consent or other action on the part of the Series Z-1 Partners or any other Partners of the Partnership, revise and amend the requirement in (y) above (and any definitions involved therein) to reflect one or more different or additional parameters, objectives or performance measures, so long as the Compensation Committee, in its reasonable good faith discretion, determines that the revised or amended clause (y) is, considered as a whole, comparable or more effective as a means for analyzing the performance of the Partnership and incentivizing the Series Z- 1 Partners (it being understood that such amended or restated clause (y) shall not be more difficult to achieve than the present requirements of clause (y)).


      6



      "Series Z-1 Distribution Ratchet Percentage" with respect to any Series Z-1 Incentive Unit (i) shall equal 10% on the date of issuance of such Series Z-1 Incentive Unit, (ii) shall increase, on January 1 of the first calendar year after the date of issuance of such Series Z-1 Incentive Unit, to (a) twenty-five percent (25%) if the Series Z-1 Conversion Ratchet Percentage with respect to such Series Z-1 Incentive Units also increases to 20% percent, or (b) fifteen percent (15%) if the Series Z-1 Conversion Ratchet Percentage with respect to such Series Z-1 Incentive Units remains at 0%, (iii) shall increase, to the extent it has not already done so, to twenty-five percent (25%) at such time as such Series Z-1 Conversion Ratchet Percentage is equal to 20%, and (iv) after such time as the Conversion Ratchet Percentage with respect to such Series Z-1 Incentive Units is equal to or greater than 30%, the Series Z-1 Distribution Ratchet Percentage shall be equal to the Series Z-1 Conversion Ratchet Percentage with respect to such Series Z-1 Incentive Units.

      "Series Z-1 Forfeited Capital Account" shall mean that portion of the Capital Account attributable to a Series Z-1 Incentive Unit equal to the product of (a) the excess of (i) the Adjusted Capital Account Balance (as defined in Section 10.10(a)) allocable to such Series Z-1 Incentive Unit over (ii) the sum of (A) the capital contribution made with respect to such Series Z-1 Incentive Unit and (B) the excess of the sum of the net allocations of operating income made with respect to such Series Z-1 Incentive Unit for all fiscal years (taking into account allocations of Net Operating Loss made with respect to such Series Z-1 Incentive Unit for all fiscal years) over the distributions of operating cash flow made to such Series Z-1 Incentive Unit (except to the extent such allocations have reduced the Series Z-1 Clawback Amount) multiplied by (b) 100% minus the Series Z-1 Conversion Ratchet Percentage applicable to such Series Z-1 Incentive Unit.

      "Series Z-1 Incentive Unit" shall mean a Series Z-1 Incentive Unit of limited partnership interest in the Partnership with the rights set forth in this Amendment.

      "Series Z-1 Percentage Interest" shall mean, with respect to any holder of Series Z-1 Incentive Units, the undivided percentage ownership interest of such Partner in the Partnership as determined by dividing (A) the product resulting from multiplying the total number of outstanding Series Z-1 Incentive Units owned by such Partner by the Series Z-1 Distribution Ratchet Percentage attributed to such holder's Series Z-1 Incentive Units, by (B) the sum of (x) the total number of Partnership Units then outstanding (excluding the Series A Preferred Interest, the Series B Preferred Interest, the Series B Partnership Units, the Series C Preferred Interest, the Series C Partnership Units, the Series D Preferred Interest, the Series D Preferred Units, the Series E Preferred Interest, the Series E Partnership Units, the Series Z Incentive Units and the Series Z-1 Incentive Units), (y) the total number of outstanding Series Z Incentive Units multiplied by the Distribution Ratchet Percentage with respect to each Series Z Incentive Unit, calculated on a unit-by-unit basis, and (z) the total number of outstanding Series Z-1 Incentive Units multiplied by the Series Z-1 Distribution Ratchet Percentage with respect to each such Series Z-1 Incentive Unit, calculated on a unit-by-unit basis.


      7



      "Series Z-1 Trigger Event" shall mean the earliest to occur of any of the following events:

      (i) such time as a plan of dissolution or liquidation (but not including a deemed liquidation for tax purposes in connection with one or more transfers of interest in the Partnership) of the General Partner and/or the Partnership is duly adopted by appropriate corporate or partnership action;

      (ii) the date on which the Series Z-1 Conversion Ratchet Percentage applicable to all Series Z-1 Incentive Units held by then current employees of the General Partner and/or the Partnership (i.e., other than holders of Series Z-1 Incentive Units whose employment with the General Partner and/or the Partnership has terminated) reaches 100%;

      (iii) the earliest date on which the employment of all holders of Series Z-1 Incentive Units has been terminated; and

      (iv) fifteen (15) years after the date of issuance of the first Series Z-1 Incentive Unit.

      "Series Z-1 Target FFO" shall be determined by the Compensation Committee at the time each Series Z-1 Incentive Unit is issued; the Compensation Committee shall set forth in Exhibit S hereto the Series Z-1 Target FFO amount for the fiscal year in which such Series Z-1 Incentive Unit is issued and also the amounts of the Series Z-1 Target FFO or a formula for such amounts for each fiscal year thereafter through the term of such Series Z-1 Incentive Unit; provided, however, that if the Compensation Committee determines that the Series Z-1 Target FFO amounts and/or formulae set forth in Exhibit S are no longer an appropriate corporate performance parameter for establishing management objectives or that the applicable target levels are no longer feasible in light of factors or circumstances outside of the Partnership's or the General Partner's control (such as general economic conditions, legal/regulatory changes, war or similar events), it may, in its reasonable good faith discretion without any consent or other action on the part of the Series Z-1 Partners or any other Partners of the Partnership, revise and amend the Series Z-1 Target FFO amounts and/or formulae set forth in Exhibit S (and any definitions involved therein) to reflect one or more different or additional parameters, objectives or performance measures, so long as the Compensation Committee, in its reasonable good faith discretion, determines that the revised or amended definition is, considered as a whole, comparable as a means for analyzing the performance of the Partnership and incentivizing the Series Z-1 Partners (it being understood that such amended or restated definition shall not be more difficult to achieve than the present requirements of this definition).


      8



      "Weighted Number of Series Z-1 Incentive Units" as determined from time to time shall mean the total number of outstanding Series Z-1 Incentive Units, multiplied by the Series Z-1 Conversion Ratchet Percentage with respect to each such Series Z-1 Incentive Unit, calculated on a unit-by- unit basis.

    5. Restatement of Exhibit E. Exhibit E to the Partnership Agreement is amended and restated by replacing such Exhibit E with Exhibit E attached to this Amendment. From time to time, when a Series Z-1 Partner is admitted to the Partnership in accordance with this Amendment and the Partnership Agreement, Exhibit A (Partnership Units) and Exhibit M (Addresses of Partners) shall be amended by the General Partner as necessary, as determined by the General Partner in its sole discretion.
    6. Admission of Series Z-1 Partners. Effective immediately prior to the effectiveness of the next succeeding sentence, the capital accounts of the Partnership shall be adjusted to reflect each Partner's share of the net fair market value of the Partnership's assets (a "book-up") by adjusting the Gross Asset Values of all Partnership assets to their respective gross fair market values and allocating the amount of such adjustment as Net Property Gain or Net Property Loss pursuant to Section 2(b) or 2(c) of Exhibit E hereof. Each person who is issued a Series Z-1 Incentive Unit shall (a) make a Capital Commitment to the Partnership in the amount of $1.00 per Unit and (b) be admitted as an Additional Limited Partner in accordance with Sections 4.3 and 4.6 of the Partnership Agreement, holding that number of Series Z-1 Incentive Units as is set forth next to his or her name on Exhibit R. It is the intention of the Partnership that only directors, officers or other employees of the General Partner shall be issued Series Z-1 Incentive Units and only such persons may become Series Z-1 Partners. At the Partnership's election, taking into account the provisions of Section 402 of the Sarbanes-Oxley Act of 2002, the Partnership may allow a Series Z-1 Partner to have a positive Series Z-1 Clawback Amount. If the Partnership does not elect to allow a Series Z-1 Partner to have such a positive Series Z-1 Clawback Amount, then upon the issuance of any Series Z-1 Incentive Units to such Series Z-1 Partner, the Capital Commitment calculated on a unit-by-unit basis for such Series Z Incentive Units shall be immediately due and payable to the Partnership. Each person who is issued a Series Z-1 Incentive Unit shall become a party to the Partnership Agreement as a Limited Partner and shall be bound by all the terms, conditions and other provisions of the Partnership Agreement, as amended by this Amendment. Pursuant to Section 4.6(b) of the Partnership Agreement, the General Partner hereby consents to the admission of each Person who is issued a Series Z-1 Incentive Unit as an Additional Limited Partner of the Partnership. The admission of a Series Z-1 Partner shall become effective as of the date such Series Z-1 Partner executes a counterpart signature page to this Amendment (and such other written agreements as the General Partner may require), which shall also be the date on which the name of a Series Z-1 Partner is recorded on the books and records of the Partnership. The admission of a Series Z-1 Partner shall not require the consent or approval of any other Limited Partner.
    7. Distributions to Series Z-1 Partners. The Partnership Agreement is hereby amended by adding the following language after Section 6.2(d) thereof.

    8. 9



      "(e) Notwithstanding the foregoing, at any time that the Series Z-1 Clawback Amount with respect to a Series Z-1 Incentive Unit is greater than zero, then, to the extent of such Series Z-1 Clawback Amount, the distributions otherwise provided for by this Section with respect to such Series Z-1 Incentive Unit shall not be paid in cash and shall instead be deemed to offset the applicable Series Z-1 Partners' unpaid Capital Commitment and thereby reduce the then existing Series Z-1 Clawback Amount with respect to such Series Z-1 Incentive Unit in an amount equal to the distributions that would have otherwise been paid with respect to such Series Z-1 Incentive Unit."

    9. Transfer Restrictions. Section 9.2(a) of the Partnership Agreement shall be amended by inserting the following as the last sentence thereof:
    10. "In addition, the Partners hereby acknowledge and agree that the Series Z-1 Incentive Units shall not be Transferred, other than (a) by operation of law to the estate of a Series Z-1 Partner or (b) to the Partnership or the General Partner."

    11. Conversion Rights of Series Z-1 Partners.
      1. Section 10.8 of the Partnership Agreement is hereby amended by deleting the first sentence thereof and replacing it with the following:
      2. "So long as Code Section 1014 or a successor provision remains in effect and provides for the "step-up" in basis of an asset upon death, as determined by the Partnership's counsel, upon the death of a Limited Partner, all of such Limited Partner's Partnership Units shall, without the taking of any action by the General Partner or any heir, representative, administrator or executor of or for such Limited Partner, automatically convert as of the date of such death into shares of Common Stock in the amount of the Common Stock Amount; provided that the General Partner, in its sole and absolute discretion, shall have the option, instead of issuing the Common Stock Amount to the estate of the decedent Limited Partner, of paying to such estate the Cash Amount or any combination of cash and Common Stock equal to the Cash Amount; provided, however, that, notwithstanding the foregoing, the provisions of this Section shall not apply to any Series Z Incentive Units or Series Z-1 Incentive Units held by such Limited Partner."

      3. The Partnership Agreement is hereby amended by adding the following language after Section 10.9 thereof:

      "10.10 Conversion and Redemption of Series Z-1 Incentive Units.

      (a) Upon the occurrence of any Series Z-1 Trigger Event with respect to the Series Z-1 Incentive Units, the Series Z-1 Forfeited Capital Account with respect to such Series Z-1 Incentive Units shall be forfeited and each such Series Z-1 Incentive Unit shall, without the taking of any action by the General Partner or any Series Z-1 Partners, automatically convert into that number of Common Units calculated by dividing (i) the remainder resulting from (x) the portion of the adjusted Capital Account balance properly allocable to each such Series Z-1 Incentive Unit at the time of conversion, as determined by the General Partner, taking into account all allocations made pursuant to Exhibit E hereof (including Section 2(e) thereof) through and including the date of the conversion (as so adjusted, the "Adjusted Capital Account Balance"), minus (y) the Series Z-1 Forfeited Capital Account as of the time of conversion minus (z) the Series Z-1 Clawback Amount, if any, with respect to such Series Z-1 Incentive Unit, by (ii) the adjusted Capital Account balance properly allocable to one Common Unit determined immediately prior to such conversion, after taking into account any adjustments made pursuant to Exhibit E hereof (including Section 2(e) thereof) through and including the date of conversion.


      10



      (b) In the event of a Series Z-1 Change in Control, (1) the Partnership shall give each Series Z-1 Partner notice as required by Section 10.10(d) and otherwise comply with the procedures set forth in such Section and (2) upon or at any time (except as expressly provided in clause (ii) below) following the occurrence of such Series Z-1 Change in Control, each Series Z-1 Partner shall have the right to elect, in accordance with the procedures set forth in Section 10.10(d), to forfeit the Series Z-1 Forfeited Capital Account with respect to all of the Series Z-1 Incentive Units held by such Series Z-1 Partner and convert each such Series Z-1 Incentive Unit into either:

      (i) that number of Common Units calculated by dividing (I) the remainder resulting from (x) the Adjusted Capital Account balance properly allocable to each such Series Z-1 Incentive Unit at the time of an election pursuant to this Section 10.10(b), as determined by the General Partner after taking into account all allocations required to be made pursuant to Exhibit E hereof, including Section 2(e) thereof) minus (y) the Series Z-1 Forfeited Capital Account as of the time of conversion, minus (z) the Series Z-1 Clawback Amount, if any, with respect to such Series Z-1 Incentive Unit, by (II) the adjusted Capital Account balance properly allocable to one Common Unit determined immediately prior to such conversion, after taking into account any adjustments made pursuant to Exhibit E hereof (including Section 2(e) thereof) through and including the date of conversion; provided, however, that, if applicable, references to "Common Units" in this clause shall be deemed to refer to the class or series of equity interests in the Substitute Umbrella Partnership (as defined in Section 10.10(c)) most comparable to the Common Units, after taking into account all relevant rights, benefits, terms and conditions and economic factors and all references to capital account balances and numbers of Common Units shall be equitably adjusted, as nearly as may be practicable, to give effect to the rights and obligations of the Series Z-1 Incentive Units or, if applicable, the Substitute Incentive Units; or

      (ii) that amount and type of cash, securities or other property as such holder would have received in connection with such Series Z-1 Change in Control if he, she or it had elected to convert such Series Z-1 Incentive Units into Common Units in accordance with the immediately preceding clause (i) prior to the consummation of the Series Z-1 Change in Control and received (or had the right to elect to receive) such consideration in connection with the Series Z-1 Change in Control as the Holder of the number of Common Units into which such Series Z-1 Incentive Units would have converted as of the date of occurrence of such Change of Control without any increase in the Series Z-1 Conversion Ratchet Percentage that may have occurred after such date; provided, however, that any election pursuant to this clause (ii) must be made within the twelve (12) month period immediately following the occurrence of such Series Z-1 Change in Control. For the avoidance of doubt, it is the intent of the parties hereto that a holder's right to make the election provided in this clause (ii) shall continue notwithstanding that, within such twelve (12) month period, another Series Z-1 Change in Control occurs, such holder's employment is terminated as referred to in clause (e) below, or such holder dies as referred to in clause (f) below; provided, further, that if a Series Z-1 Trigger Event occurs, such holder's right to make the election provided in this clause (ii) shall continue only until the moment immediately prior to the occurrence of such Series Z-1 Trigger Event.


      11



      For the avoidance of doubt, the Series Z-1 Incentive Units of any Series Z-1 Partner who has not made the election contemplated by this Section 10.10(b) shall remain outstanding until such election is made or another clause of this Section 10.10 becomes applicable, and thereafter shall continue to be entitled to all the rights and benefits of the Series Z-1 Incentive Units, including without limitation the right to make an election pursuant to this Section 10.10(b) with respect to any subsequent Series Z-1 Change in Control and the potential for continued increase in the Series Z-1 Conversion Ratchet Percentage.

      (c) Notwithstanding anything in this Agreement to the contrary, in connection with any Series Z-1 Change in Control following which the Partnership will not continue to exist as a separate legal entity or following which the Partnership, despite continuing in legal existence, will no longer conduct its business in a fashion substantially similar to the fashion in which it conducted its business immediately prior to such Series Z-1 Change of Control (e.g., owning similar properties and operating in a comparable fashion), the General Partner shall use commercially reasonable efforts (after taking into account the fiduciary duties owed by the General Partner to the other Partners in the Partnership in connection with negotiating the Series Z-1 Change in Control transaction as a whole) to cause the resulting or surviving entity and/or the entity primarily succeeding to the business of the Partnership, as the case may be, to be a partnership, limited liability company or other pass- through entity organized under the laws of any state of the United States or the District of Columbia (a "Substitute Umbrella Partnership"), and, in the event the Series Z-1 Change in Control does result in a Substitute Umbrella Partnership, shall use commercially reasonable efforts to (1) cause the Substitute Umbrella Partnership to issue in connection with such Series Z-1 Change in Control in substitution for any Series Z-1 Incentive Units remaining outstanding as of the effective time thereof other interests in the Substitute Umbrella Partnership having substantially the same terms and rights as the Series Z-1 Incentive Units, including with respect to distributions, conversions, ratcheting, voting rights and rights upon liquidation, dissolution or winding-up (the "Substitute Z-1 Incentive Units"), (2) make equitable and appropriate provisions for adjustments to the terms of the Substitute Z-1 Incentive Units such that the rights and obligations of the Series Z-1 Partners after such Series Z-1 Change in Control as holders of Substitute Z-1 Incentive Units of the Substitute Umbrella Partnership shall be equivalent, as nearly as may be practicable, to their rights and obligations as holders of Series Z-1 Incentive Units of the Partnership, and (3) secure a commitment of the general partner or other controlling person of the Substitute Umbrella Partnership to undertake to perform the obligations and covenants of the General Partner with respect to the Series Z-1 Partners.


      12



      (d) As promptly as possible prior to the consummation of a Series Z-1 Change of Control (but in any event not later than ten (10) days following consummation of such Series Z-1 Change in Control), the Partnership shall deliver a written notice of such Series Z-1 Change of Control to each Series Z-1 Partner at their addresses as shown on the records of the Partnership, containing all instructions and materials necessary to enable such Series Z-1 Partners to make an election pursuant to Section 10.10(b) hereof and describing the circumstances and relevant facts regarding such Series Z-1 Change of Control, including, without limitation, the expected date of consummation. Failure to give or receive such notice or any defect therein shall not affect the legality or validity of any proceedings in connection with such Series Z-1 Change of Control or otherwise as contemplated by this Agreement. Each Series Z-1 Partner may exercise his or her right to convert in accordance with Section 10.10(b) by delivering written notice of such intent (and specifying whether he or she is electing to convert pursuant to Section 10.10(b)(i) or Section 10.10(b)(ii)) to the Partnership, Attn: Chief Financial Officer, with a copy to Morrison & Foerster LLP, Attn: Stephen J. Schrader, Esq. (such notice, an "Election Notice"). On or before the later of (i) the effective date of such Series Z-1 Change in Control and (ii) the tenth (10th) business day following the date of such Election Notice, the Partnership shall issue the consideration required by Section 10.10(b) to the Series Z-1 Partner making the election in exchange for his or her Series Z-1 Incentive Units (or, if applicable, Substitute Z-1 Incentive Units).

      (e) Effective as of such time as (other than by reason of death, as provided in Section 10.10(f)) a holder of Series Z-1 Incentive Units is no longer an employee of the Partnership, the General Partner or any of their subsidiaries or affiliates, the Series Z-1 Forfeited Capital Account with respect to such holder's Series Z-1 Incentive Units shall be forfeited and the Partnership shall have the right, for 90 days following the date of termination of such holder's employment, to redeem each Series Z-1 Incentive Unit held by such holder in exchange for, at the Partnership's option, either (1) a number of shares of Common Stock then owned by the Partnership calculated by dividing (i) the remainder resulting from (x) the Adjusted Capital Account Balance properly allocable to each such Series Z-1 Incentive Unit as determined by the General Partner after taking into account all allocations required to be made pursuant to Exhibit E hereto (including Section 2(e) thereof) and, in the event the provisions of Section 2(g) thereof are inapplicable, in a manner consistent with the provisions of Treasury Regulation Section 1.704-1(b)(2)(iv)(f) minus (y) the Series Z-1 Forfeited Capital Account as of the time of redemption minus (z) the Series Z-1 Clawback Amount, if any, with respect to such Series Z-1 Incentive Unit, by (ii) the Closing Price of Common Stock determined as of such date; or (2) a number of Common Units calculated by dividing (i) the remainder resulting from (x) the Adjusted Capital Account Balance which would be allocable to each such Series Z-1 Incentive Unit as determined by the General Partner after taking into account all allocations required to be made pursuant to Exhibit E hereof (including Section 2(e) thereof) and assuming that the Capital Accounts of the Partners were adjusted at such time as provided in Section 2(g) of Exhibit E hereto minus (y) the Series Z-1 Forfeited Capital Account minus (z) the Series Z-1 Clawback Amount, if any, with respect to such Series Z- 1 Incentive Unit, by (ii) the adjusted Capital Account balance properly allocable to one Common Unit determined immediately prior to such redemption, after taking into account any adjustments made pursuant to Exhibit E hereof (including Section 2(e) thereof) and assuming that the Capital Accounts of the Partners were adjusted at such time as provided in Section 2(g) of Exhibit E hereto through and including the date of redemption. The Partnership may exercise its rights under this Section 10.10(e) by providing written notice to the terminated Series Z-1 Partner within 90 days of such termination and consummating the redemption promptly thereafter.


      13



      (f) Upon the death of a holder of Series Z-1 Incentive Units, the Series Z-1 Forfeited Capital Account with respect to such Series Z-1 Incentive Units, shall be forfeited and each such Series Z-1 Incentive Unit held by such holder shall be redeemed by the Partnership for, at its option, either (1) a number of shares of Common Stock then owned by the Partnership calculated by dividing (i) the remainder resulting from (x) the Adjusted Capital Account Balance properly allocable to each such Series Z-1 Incentive Unit as determined by the General Partner after taking into account all allocations required to be made by Exhibit E hereto (including Section 2(e) thereof) and in the event that the provisions of Section 2(g) are inapplicable, in a manner consistent with the provisions of Treasury Regulation Section 1.704- 1(b)(2)(iv)(f) minus (y) the Series Z-1 Forfeited Capital Account as of the time of redemption minus (z) the Series Z-1 Clawback Amount, if any, with respect to such Series Z-1 Incentive Unit, by (ii) the Closing Price of Common Stock determined immediately prior to such redemption; or (2) a number of Common Units calculated by dividing (i) the remainder resulting from (x) the Adjusted Capital Account Balance which would be allocable to each such Series Z-1 Incentive Unit as determined by the General Partner after taking into account all allocations required to be made by Exhibit E hereto (including Section 2(e) thereof) and in the event that the provisions of Section 2(g) are inapplicable, in a manner consistent with the provisions of Treasury Regulation Section 1.704-1(b)(2)(iv)(f) minus (y) the Series Z-1 Forfeited Capital Account as of the time of redemption minus (z) the Series Z-1 Clawback Amount, if any, with respect to such Series Z-1 Incentive Unit, by (ii) the average adjusted Capital Account balance properly allocable to one Common Unit determined immediately prior to such redemption, as determined by the General Partner after taking into account all allocations required to be made by Exhibit E hereto (including Section 2(e) thereof) and in the event that the provisions of Section 2(g) are inapplicable in a manner consistent with the provisions of Treasury Regulation Section 1.704- 1(b)(2)(iv)(f). The Partnership shall effect the redemption required by this Section 10.10(f) within 60 days follow its receipt of written notification of the death of a Series Z-1 Partner.

      (g) In lieu of delivering a fractional share of Common Stock pursuant to this Section 10.10, the Partnership may deliver cash equal to the Closing Price attributable to such fractional share. In lieu of issuing a fractional Common Unit pursuant to this Section 10.10, the Partnership may deliver cash equal to the product of (i) the Closing Price multiplied by the Series Z-1 Conversion Ratchet Percentage, and (ii) such fractional Common Unit. For the avoidance of doubt, as to any fractional Common Unit or fraction of a share of Common Stock which would otherwise be delivered, the Partnership shall pay a cash adjustment in respect of such final fraction (which for each holder of Series Z-1 Incentive Units shall be deemed to be a fraction of the last fractional Common Unit or fraction of a share of Common Stock after taking into account all Series Z-1 Incentive Units held by such holder, not on a unit-by- unit basis) in the amount provided for in this clause (g).


      14



      (h) The holder of any Common Units received upon a conversion or redemption of Series Z-1 Incentive Units pursuant to this Section 10.10 shall have an aggregate Capital Account balance with respect to such Common Units equal to the remainder resulting from (x) the Adjusted Capital Account Balance of such holder's Series Z-1 Incentive Units (determined pursuant to the applicable sub-section of this Section 10.10) immediately prior to conversion or redemption minus (y) the Series Z-1 Forfeited Capital Account minus (z) the Series Z-1 Clawback Amount, if any, with respect to such Series Z- 1 Incentive Unit, and such holder of Common Units shall have all of the rights of holders of Common Units as set forth in this Agreement. Immediately upon conversion or redemption of any Series Z-1 Incentive Units pursuant to this Section 10.10, the aggregate Series Z-1 Forfeited Capital Accounts with respect to all Series Z-1 Incentive Units being converted or redeemed shall be reallocated among the Capital Accounts of the holders of Common Units immediately subsequent to such conversion or redemption on a pro rata basis, in proportion to the Capital Account balances of all such units immediately subsequent to such conversion or redemption. Any Common Units received upon the conversion or redemption of Series Z-1 Incentive Units pursuant to this Section 10.10 may thereafter be converted into Common Stock pursuant to Section 10.8 and the holder of such Common Units shall have the Rights provided in Article XI; provided, however, that, notwithstanding anything to the contrary contained in Section 10.8, Article XI or Exhibit I, (i) the General Partner may, in its sole discretion, choose to assign its obligation pursuant to Section 10.8, Article XI or Exhibit I, as the case may be, to the Partnership, in which case the Partnership will deliver shares of Common Stock that it holds on such date in exchange for the Common Units to be converted or redeemed, in lieu of the General Partner issuing new shares of Common Stock to the holder of such Common Units and (ii) neither the General Partner nor the Partnership shall pay cash (in whole or in part) with respect to the conversion of Common Units received upon conversion or redemption of Series Z-1 Incentive Units."

    12. Restatement of Exhibit E. Exhibit E to the Partnership Agreement is hereby amended and restated in its entirety by replacing such Exhibit E with Exhibit E attached to this Amendment.
    13. Voting Rights.
      1. Holders of the Series Z-1 Incentive Units will not have any voting rights or rights to consent to any matters, except as set forth in Section 10(b) below.
      2. So long as any Series Z-1 Incentive Unit remains outstanding, the Partnership shall not, without the affirmative vote of the holders of at least two-thirds (2/3) of the Weighted Number of Series Z-1 Incentive Units amend, alter or repeal any provisions of the Partnership Agreement, including, without limitation, as a result of, or in connection with, a merger, consolidation or otherwise, in a manner that would materially and adversely affect the powers, special rights, preferences, privileges or voting power of the Series Z-1 Incentive Units or the holders thereof; provided, however, that the following shall be deemed not to materially and adversely affect such powers, special rights, preferences, privileges or voting power of the Series Z- 1 Incentive Units: (a) any revision or amendment of the definition of "Series Z-1 Conversion Ratchet Percentage" or "Series Z-1 Target FFO" in accordance with the proviso contained in each such definition; (b) any increase in the amount of Partnership Interests, or the creation or issuance of any other class or series of Partnership Interests, or obligation or security convertible into, or evidencing the right to purchase, any such Partnership Interests, ranking senior to, junior to or on a parity with the Series Z-1 Incentive Units with respect to payment of distributions or the distribution of assets upon liquidation, dissolution or winding up; or (c) any amendment, alteration or repeal of any provision(s) of the Partnership Agreement that also materially and adversely affects the Common Units or the holders thereof in a comparable and proportionate fashion; provided, further, that with respect to the occurrence of a merger, consolidation or comparable transaction, so long as (1) the Partnership is the surviving entity and the Series Z-1 Incentive Units remain outstanding with the terms thereof unchanged, or (2) the resulting, surviving or transferee entity is a partnership, limited liability company or other pass-through entity organized under the laws of any state and substitutes the Series Z-1 Incentive Units for other interests in such entity having substantially the same terms and rights as the Series Z-1 Incentive Units, including with respect to distributions, conversions, voting rights and rights upon liquidation, dissolution or winding-up, then the occurrence of any such event shall not be deemed to materially and adversely affect such rights, privileges or voting powers of the holders of the Series Z-1 Incentive Units. Notwithstanding anything in this Section 10 to the contrary, the holders of Series Z-1 Incentive Units shall have no right to vote or consent with respect to any transaction that constitutes a Series Z-1 Trigger Event or that constitutes a Series Z-1 Change in Control so long as the provisions of Section 10.10(b) of the Partnership Agreement remain in effect.

      15



    14. Exhibit R. The Partnership Agreement is hereby amended by adding Exhibit R, a copy of which is attached hereto. Exhibit R is hereby inserted into the Partnership Agreement following Exhibit Q.
    15. Ranking. The Series Z-1 Incentive Units shall rank (i) junior to any and all presently outstanding or subsequently issued Preferred Interests and preferred Partnership Units of the Partnership, unless the terms of such Preferred Interests and/or preferred Partnership Units expressly provide that they shall rank junior to or pari passu with the Series Z-1 Incentive Units or Common Units, and (ii) pari passu with the Common Units, the Series Z Incentive Units and with any other class or series of presently existing or subsequently issued Partnership Units of the Partnership, the terms of which do not expressly provide that such Partnership Units shall rank senior to the Series Z-1 Incentive Units or the Common Units with respect to the receipt of distributions and of amounts distributable upon liquidation, dissolution or winding up.
    16. Continuing Effect of Partnership Agreement. Except as modified herein, the Partnership Agreement is hereby ratified and confirmed in its entirety and shall remain and continue in full force and effect, provided, however, that to the extent there shall be a conflict between the provisions of the Partnership Agreement and this Amendment, the provisions in this Amendment will prevail. All references in any document to the Partnership Agreement shall mean the Partnership Agreement, as amended hereby.
    17. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which shall constitute one and the same agreement. Facsimile signatures shall be deemed effective execution of this Agreement and may be relied upon as such by the other party. In the event facsimile signatures are delivered, originals of such signatures shall be delivered to the other party within three business days after execution.

16



IN WITNESS WHEREOF, the General Partner and the Series Z-1 Partners have executed this Amendment as of the date indicated above.

GENERAL PARTNER

ESSEX PROPERTY TRUST, INC.,
a Maryland corporation as General Partner
of Essex Portfolio, L.P. and on behalf
of the existing Limited Partners

By: _______________

Keith R. Guericke

Chief Executive Officer & President


S-1



COUNTERPART LIMITED PARTNER SIGNATURE PAGE
ATTACHED TO AND MADE A PART OF THAT CERTAIN
SEVENTH AMENDMENT TO THE FIRST AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP OF ESSEX PORTFOLIO, L.P.

SERIES Z-1 PARTNER:

 

 

Name:____________________


S-2



EXHIBIT A

[This is the current Exhibit A maintained by Essex,updated to refer
to the new Series Z-1 Incentive Unit holders]


A-1



EXHIBIT E

ALLOCATIONS

    1. Allocation of Net Operating Income and Net Operating Loss.
      1. Net Operating Income. Except as otherwise provided herein, Net Operating Income for any fiscal year or other applicable period shall be allocated in the following order and priority:
        1. First, to the Partners, until the cumulative Net Operating Income allocated pursuant to this subparagraph 1(a)(1) for the current and all prior periods equals the cumulative Net Operating Loss allocated pursuant to subparagraph 1(b)(2) hereof for all prior periods, among the Partners in the same ratio and reverse order that such Net Operating Loss was allocated to the Partners pursuant to subparagraph 1(b)(2) hereof (and, in the event of a shift of a Partner's interest in the Partnership, to the Partners in a manner that most equitably reflects the successors in interest to the Partners).
        2. Thereafter, the balance of the Net Operating Income, if any, shall be allocated to the Partners in accordance with their respective Percentage Interests.
      2. Net Operating Loss. Except as otherwise provided herein, Net Operating Loss of the Partnership for each fiscal year or other applicable period shall be allocated as follows:
        1. To the Partners in accordance with their respective Percentage Interests.
        2. Notwithstanding subparagraph 1(b)(1) hereof, to the extent any Net Operating Loss allocated to a Partner under subparagraph 1(b)(1) hereof or this subparagraph 1(b)(2) would cause such Partner (hereinafter, a "Restricted Partner") to have an Adjusted Capital Account Deficit as of the end of the fiscal year to which such Net Operating Loss relates, such Net Operating Loss shall not be allocated to such Restricted Partner and instead shall be allocated to the other Partner(s) (hereinafter, the "Permitted Partners") pro rata in accordance with their relative Percentage Interests.
      3. Notwithstanding Sections 1(a) and (b) above, on any date on which any Series A Preferred Stock, any Series B Preferred Stock, any Series C Preferred Stock, any Series D Preferred Stock, any Series E Preferred Stock, or any Series B Preferred Unit, any Series C Preferred Unit, any Series D Preferred Unit or any Series E Preferred Unit (or other Preferred Stock or other Preferred Units) is outstanding, Net Operating Income and Net Operating Loss shall be allocated as follows:
        1. Net Operating Income for any fiscal year or other applicable period shall be allocated in the following order and priority:
          1. First, to the Partners, until the cumulative Net Operating Income allocated pursuant to this subparagraph 1(c)(1)(i) for the current and all prior periods equals the cumulative Net Operating Loss allocated pursuant to subparagraphs 1(c)(2)(iii) and (iv) hereof for all prior periods, among the Partners in the same ratio and reverse order that such Net Operating Loss was allocated (and, in the event of a shift of a Partner's interest in the Partnership, to the Partners in a manner that most equitably reflects the successors-in-interest to such Partners).

          2. E-1



          3. Second, to the General Partner, until the cumulative Net Operating Income allocated pursuant to this subparagraph 1(c)(1)(ii) for the current and all prior periods equals the cumulative Net Operating Loss allocated pursuant to subparagraph 1(c)(2)(ii) hereof for all prior periods;
          4. Third, on a pari passu basis, to (A) the General Partner until the cumulative amount of Net Operating Income allocated pursuant to this subparagraph 1(c)(1)(iii) equals the total amount of dividends paid on the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock and the Series E Preferred Stock (and other Preferred Stock) as of or prior to the date of such allocation plus the total amount of accrued but unpaid dividends on the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock and the Series E Preferred Stock (and other Preferred Stock) as of such date; (B) to the holders of Series B Preferred Units until the cumulative amount of Net Operating Income allocated pursuant to this subparagraph 1(c)(1)(iii) equals the total amount of Priority Return paid on the Series B Preferred Units as of or prior to the date of such allocation plus the total amount of accrued but unpaid Priority Return on the Series B Preferred Units; (C) to the holders of Series C Preferred Units until the cumulative amount of Net Operating Income allocated pursuant to this subparagraph 1(c)(1)(iii) equals the total amount of Priority Return paid on the Series C Preferred Units as of or prior to the date of such allocation plus the total amount of accrued but unpaid Priority Return on the Series C Preferred Units; (D) to the holders of Series D Preferred Units until the cumulative amount of Net Operating Income allocated pursuant to this subparagraph 1(c)(1)(iii) equals the total amount of Priority Return paid on the Series D Preferred Units as of or prior to the date of such allocation plus the total amount of accrued but unpaid Priority Return on the Series D Preferred Units; and (E) to the holders of Series E Preferred Units until the cumulative amount of Net Operating Income allocated pursuant to this subparagraph 1(c)(1)(iii) equals the total amount of Priority Return paid on the Series E Preferred Units as of or prior to the date of such allocation plus the total amount of accrued but unpaid Priority Return on the Series E Preferred Units.
          5. Thereafter, the balance of the Net Operating Income, if any, shall be allocated to the Partners in accordance with their respective Percentage Interests.
        2. Net Operating Loss of the Partnership for each fiscal year or other applicable period shall be allocated as follows:
          1. First, to the Partners in accordance with, their respective Percentage Interests until the Capital Account balances of the Limited Partners (not including the holders of the Series B Preferred Units, the Series C Preferred Units, the Series D Preferred Units and the Series E Preferred Units) are reduced to zero (for purposes of this calculation, each Partner's Capital Account balance shall be credited with the amount such Partner is obligated to restore pursuant to the provisions of Section 1.704-1(b)(2)(ii)(c) of the Regulations, or is deemed to be obligated to restore with respect to any deficit balance pursuant to the penultimate sentences of Sections 1.704-2(g)(1) and 1.704-2(i)(5) of the Regulations);

          2. E-2



          3. Second, on a pari passu basis, to (A) the General Partner until its Capital Account balance has been reduced to zero; (B) to the holders of Series B Preferred Units until their Capital Account balances have been reduced to zero (for purposes of this calculation, such Partners' share of Partnership Minimum Gain shall be added back to their Capital Accounts); (C) to the holders of Series C Preferred Units until their Capital Account balances have been reduced to zero; (D) to the holders of Series D Preferred Units until their Capital Account balances have been reduced to zero; and (E) to the holders of Series E Preferred Units until their Capital Account balances have been reduced to zero (for purposes of each such calculation, each Partner's Capital Account balance shall be credited with the amount such Partner is obligated to restore pursuant to the provisions of Section 1.704-1(b)(2)(ii)(c) of the Regulations, or is deemed to be obligated to restore with respect to any deficit balance pursuant to the penultimate sentences of Sections 1.704-2(g)(1) and 1.704-2(1)(5) of the Regulations);
          4. Thereafter, to the Partners in accordance with their then Percentage Interests;
          5. Notwithstanding subparagraph 2(c)(2)(iii) hereof, to the extent any Net Operating Loss allocated to a Partner under subparagraph 2(c)(2) would cause such Partner (hereinafter, a "Restricted Partner") to have an Adjusted Capital Account Deficit as of the end of the fiscal year to which such Net Operating Loss relates, such Net Operating Loss shall not be allocated to such Restricted Partner and instead shall be allocated to the other Partner(s) (hereinafter, the "Permitted Partners") pro rata in accordance with their relative Percentage Interests.
      4. Adjustment of Percentage Interests Upon Conversion of Convertible Preferred Stock to Common Stock. Upon the conversion of any Series A Preferred Stock to Common Stock of the General Partner, the Percentage Interests of the Partners shall be adjusted in accordance with the provisions of Article IV of the Partnership Agreement as if, on the date of such conversion, the General Partner had made an additional Capital Contribution to the Partnership in an amount equal to the number of shares of Common Stock issued as a result of such conversion multiplied by the fair market value of such shares on the date of conversion, and provided that in calculating such adjustments, the General Partner shall be deemed not to have incurred any expenses in connection with raising the funds used to make such additional Capital Contribution.
    2. Allocation of Net Property Gain and Net Property Loss.
    3. After the allocation of Net Operating Income or Net Operating Loss has been made pursuant to Section 1 above, Net Property Gain and Net Property Loss shall be allocated as follows:

      1. Net Property Gain. Except as otherwise provided herein, Net Property Gain for any fiscal year or other applicable period shall be allocated in the following order and priority:

        1. E-3



        2. First, to the Partners, until the cumulative Net Property Gain allocated pursuant to this subparagraph 2(a)(1) for the current and all prior periods equals the cumulative Net Property Loss allocated pursuant to subparagraph 2(b)(2) hereof for all prior periods, among the Partners in the same ratio and reverse order that such Net Property Loss was allocated to the Partners pursuant to subparagraph 2(b)(2) hereof (and, in the event of a shift of a Partner's interest in the Partnership, to the Partners in a manner that most equitably reflects the successors in interest to the Partners).
        3. Thereafter, the balance of the Net Property Gain, if any, shall be allocated to the Partners in accordance with their respective Percentage Interests.
      2. Net Property Loss. Except as otherwise provided herein, Net Property Loss of the Partnership for each fiscal year or other applicable period shall be allocated as follows:
        1. To the Partners in accordance with their respective Percentage Interests.
        2. Notwithstanding subparagraph 2(b)(1) hereof, to the extent any Net Property Loss allocated to a Partner under subparagraph 2(b)(1) hereof or this subparagraph 2(b)(2) would cause such Partner (hereinafter, a "Restricted Partner") to have an Adjusted Capital Account Deficit as of the end of the fiscal year to which such Net Property Loss relates, such Net Property Loss shall not be allocated to such Restricted Partner and instead shall be allocated to the other Partner(s) (hereinafter, the "Permitted Partners") pro rata in accordance with their relative Percentage Interests.
      3. Notwithstanding Sections 2(a) and (b) above, on any date on which any Series A Preferred Stock, any Series B Preferred Stock, any Series C Preferred Stock, any Series D Preferred Stock, any Series E Preferred Stock or any Series B Preferred Unit, any Series C Preferred Unit, any Series D Preferred Unit or any Series E Preferred Unit (or other Preferred Stock or other Preferred Units) is outstanding, Net Property Gain and Net Property Loss shall be allocated as follows:
        1. Net Property Gain for any fiscal year or other applicable period shall be allocated in the following order and priority:
          1. First, to the Partners, until the cumulative Net Property Gain allocated pursuant to this subparagraph 2(c)(1)(i) for the current and all prior periods equals the cumulative Net Property Loss allocated pursuant to subparagraphs 2(c)(2)(iii) and (iv) hereof for all prior periods, among the Partners in the same ratio and reverse order that such Net Property Loss was allocated (and, in the event of a shift of a Partner's interest in the Partnership, to the Partners in a manner that most equitably reflects the successors in interest to such Partners);
          2. Second, to the General Partner, until the cumulative Net Property Gain allocated pursuant to this subparagraph 2(c)(1)(ii) for the current and all prior periods equals the cumulative Net Property Loss allocated pursuant to subparagraph 2(c)(2)(ii) hereof for all prior periods;

          3. E-4



          4. Third, on a pari passu basis, to (A) the General Partner until the sum of (x) the total cumulative amount of Net Operating Income allocated to the General Partner under Section 1(c)(1)(iii) for the current and all prior periods plus (y) the total cumulative amount of Net Property Gain allocated pursuant to this subparagraph 2(c)(1)(iii) equals the total amount of dividends paid on the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock and the Series E Preferred Stock (and other Preferred Stock) as of or prior to the date of such allocation plus the total amount of accrued but unpaid dividends on the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock and the Series E Preferred Stock (and other Preferred Stock) as of such date; (B) to the holders of Series B Preferred Units until the sum of (x) the total cumulative amount of Net Operating Income allocated to the holders of the Series B Preferred Units under Section 1(c)(l)(iii) for the current and all prior periods plus (y) the total cumulative amount of Net Property Gain allocated pursuant to this subparagraph 2(c)(1)(iii) to the holders of the Series B Preferred Units equal the total amount of Priority Return paid on the Series B Preferred Units as of or prior to the date of such allocation plus the total amount of accrued but unpaid Priority Return on the Series B Preferred Units; (C) to the holders of Series C Preferred Units until the sum of (x) the total cumulative amount of Net Operating Income allocated to the holders of the Series C Preferred Units under Section 1(c)(1)(iii) for the current and all prior periods plus (y) the total cumulative amount of Net Property Gain allocated pursuant to this subparagraph 2(c)(1)(iii) to the holders of the Series C Preferred Units equals the total amount of Priority Return paid on the Series C Preferred Units as of or prior to the date of such allocation plus the total amount of accrued but unpaid Priority Return on the Series C Preferred Units; (D) to the holders of Series D Preferred Units until the sum of (x) the total cumulative amount of Net Operating Income allocated under Section 1(c)(1)(iii) for the current and all prior periods plus (y) the cumulative amount of Net Property Gain allocated pursuant to this subparagraph 2(c)(1)(iii) to the holders of the Series D Preferred Units equals the total amount of Priority Return paid on the Series D Preferred Units as of or prior to the date of such allocation plus the total amount of accrued but unpaid Priority Return on the Series D Preferred Units; (E) to the holders of Series E Preferred Units until the sum of (x) the total cumulative amount of Net Operating Income allocated under Section 1(c)(1)(iii) for the current and all prior periods plus (y) the cumulative amount of Net Property Gain allocated pursuant to this subparagraph 2(c)(1)(iii) to the holders of the Series E Preferred Units equals the total amount of Priority Return paid on the Series E Preferred Units as of or prior to the date of such allocation plus the total amount of accrued but unpaid Priority Return on the Series E Preferred Units.
          5. Thereafter, the balance of the Net Property Gain, if any, shall be allocated to the Partners in accordance with their respective Percentage Interests.
        2. Net Property Loss of the Partnership for each fiscal year or other applicable period shall be allocated as follows:
          1. First, to the Partners in accordance with their respective Percentage Interests until the Capital Account balances of the Limited Partners (not including the holders of the Series B Preferred Units, the Series C Preferred Units, the Series D Preferred Units and the Series E Preferred Units) are reduced to zero (for purposes of this calculation, such Partners' share of Partnership Minimum Gain shall be added back to their Capital Accounts);

          2. E-5



          3. Second, on a pari passu basis, to (A) the General Partner until its Capital Account balance has been reduced to zero (for purposes of this calculation, such Partner's share of Partnership Minimum Gain shall be added back to its Capital Account); (B) to the holders of Series B Preferred Units until their Capital Account balances have been reduced to zero (for purposes of this calculation, such Partners' share of Partnership Minimum Gain shall be added back to their Capital Accounts); (C) to the holders of Series C Preferred Units until their Capital Account balances have been reduced to zero (for purposes of this calculation, such Partners' share of Partnership Minimum Gain shall be added back to their Capital Accounts); (D) to the holders of Series D Preferred Units until their Capital Account balances have been reduced to zero (for purposes of this calculation, such Partners' share of Partnership Minimum Gain shall be added back to their Capital Accounts); and (E) to the holders of Series E Preferred Units until their Capital Account balances have been reduced to zero (for purposes of this calculation, such Partners' share of Partnership Minimum Gain shall be added back to their Capital Accounts);
          4. Thereafter, to the Partners in accordance with their then Percentage Interests;
          5. Notwithstanding subparagraph 2(c)(2)(iii) hereof, to the extent any Net Property Loss allocated to a Partner under subparagraph 2(c)(2) would cause such Partner (hereinafter, a "Restricted Partner") to have an Adjusted Capital Account Deficit as of the end of the fiscal year to which such Net Property Loss relates, such Net Property Loss shall not be allocated to such Restricted Partner and instead shall be allocated to the other Partner(s) (hereinafter, the "Permitted Partners") pro rata in accordance with their relative Percentage . Interests.
      4. Special Allocation to Holders of Series Z Incentive Units.
        1. Subject only to the provisions of [Section 2(c)(iii)] but notwithstanding any other provision of this Section 2, in the year in which the Partnership sells or otherwise disposes of all or substantially all of its assets in a single transaction or a series of related transactions, Net Property Gain shall first be allocated to the holders of the Series Z Incentive Units pro rata in proportion to the number of such Series Z Incentive Units outstanding, until the Capital Account balance attributable to each such Series Z Incentive Unit is equal to (A) the aggregate Capital Account balance attributable to the Common Units outstanding (including any other Partnership Units convertible into Common Units) divided by (B) the number of such Common Units outstanding. If Net Property Gain is insufficient to make the full allocation provided in the preceding sentence, then, in lieu of such special allocation of Net Property Gain provided in the preceding sentence, items of gross capital gain shall be allocated to the holders of Series Z Incentive Units, and, if such gross items are insufficient to make the full required allocation, items of gross capital loss shall be allocated pro rata with respect to such Common Units. The allocations pursuant to this paragraph (d) shall be made after the allocation of Net Operating Income or Net Operating Loss for the applicable period in which such sale or other disposition occurs. For purposes of this clause (1) of this Section 2(d) "all or substantially all" means assets representing not less than 95% of the aggregate fair market value of the Partnership's assets.

        2. E-6



        3. Notwithstanding anything herein to the contrary, for the 12-month period following the occurrence of a Change of Control (A) Net Operating Loss and Net Property Loss, if any, shall be allocated pursuant to Section 1(b) or 1(c)(2), as applicable, or Section 2(b) or 2(c)(2), as applicable, as if the Percentage Interest of each Series Z Partner were zero, and (B) with respect to each Series Z Partner at the earlier of (x) the date such Partner makes the election to convert his Series Z Incentive Units pursuant to Section 10.9(b)(i) or (y) the expiration of a period of twelve (12) months after such Change in Control, items of income, gain, deduction and loss shall be allocated so as to cause the Capital Account balance of each such Series Z Partner, and, as soon as possible after the end of such twelve month period, the Capital Account balances of all Partners, to be in the same ratio and amounts as if the allocations required by clause (A) of this Section 2(d)(2) had not been made.
      5. Special Allocation to Holders of Series Z-1 Incentive Units.
        1. Subject only to the provisions of [Section 2(c)(iii)] but notwithstanding any other provision of this Section 2, in the year in which the Partnership sells or otherwise disposes of all or substantially all of its assets in a single transaction or a series of related transactions, Net Property Gain shall first be allocated to the holders of the Series Z-1 Incentive Units pro rata in proportion to the number of such Series Z-1 Incentive Units outstanding, until the Capital Account balance attributable to each such Series Z-1 Incentive Unit is equal to (A) the aggregate Capital Account balance attributable to the Common Units outstanding (including any other Partnership Units convertible into Common Units) divided by (B) the number of such Common Units outstanding. If Net Property Gain is insufficient to make the full allocation provided in the preceding sentence, then, in lieu of such special allocation of Net Property Gain provided in the preceding sentence, items of gross capital gain shall be allocated to the holders of Series Z-1 Incentive Units, and, if such gross items are insufficient to make the full required allocation, items of gross capital loss shall be allocated pro rata with respect to such Common Units. The allocations pursuant to this paragraph (d) shall be made after the allocation of Net Operating Income or Net Operating Loss for the applicable period in which such sale or other disposition occurs. For purposes of this clause (1) of this Section 2(e) "all or substantially all" means assets representing not less than 95% of the aggregate fair market value of the Partnership's assets.
        2. Notwithstanding anything herein to the contrary, for the 12-month period following the occurrence of a Series Z-1 Change of Control (A) Net Operating Loss and Net Property Loss, if any, shall be allocated pursuant to Section 1(b) or 1(c)(2), as applicable, or Section 2(b) or 2(c)(2), as applicable, as if the Percentage Interest of each Series Z-1 Partner were zero, and (B) with respect to each Series Z-1 Partner at the earlier of (x) the date such Partner makes the election to convert his Series Z- 1 Incentive Units pursuant to Section 10.10(b)(i) or (y) the expiration of a period of twelve (12) months after such Series Z-1 Change in Control, items of income, gain, deduction and loss shall be allocated so as to cause the Capital Account balance of each such Series Z-1 Partner, and, as soon as possible after the end of such twelve month period, the Capital Account balances of all Partners, to be in the same ratio and amounts as if the allocations required by clause (A) of this Section 2(e)(2) had not been made.

        E-7



      6. Definition of Percentage Interest. Solely for purposes of allocating Net Property Gain and Net Property Loss under this Section 2, the Percentage Interest of a Series Z Incentive Unit holder attributable to such Units shall be deemed to be the undivided percentage ownership interest of such holder in the Partnership as determined by dividing (A) the total number of outstanding Series Z Incentive Units owned by such holder by (B) the total number of Partnership Units then outstanding (excluding the Series A Preferred Interest, the Series B Preferred Interest, the Series B Preferred Units, the Series C Preferred Interest, the Series C Preferred Units, the Series D Preferred Interest, the Series D Preferred Units, the Series E Preferred Interest, and the Series E Preferred Units). Solely for purposes of allocating Net Property Gain and Net Property Loss under this Section 2, the Percentage Interest of a Series Z-1 Incentive Unit holder attributable to such Units shall be deemed to be the undivided percentage ownership interest of such holder in the Partnership as determined by dividing (A) the total number of outstanding Series Z-1 Incentive Units owned by such holder by (B) the total number of Partnership Units then outstanding (excluding the Series A Preferred Interest, the Series B Preferred Interest, the Series B Preferred Units, the Series C Preferred Interest, the Series C Preferred Units, the Series D Preferred Interest, the Series D Preferred Units, the Series E Preferred Interest, and the Series E Preferred Units).
      7. Book-Up and Capital Account Adjustments. On any day on which (i) Series A Preferred Stock (or other Preferred Stock), any series of Preferred Units or Incentive Units are redeemed or converted into Common Stock or Common Units, (ii) Percentage Interests are adjusted in the manner required in subparagraph 1(d), or (iii) in connection with the issuance of the Series Z Incentive Units or the Series Z-1 Incentive Units, the Partnership shall adjust the Gross Asset Values of all Partnership assets to equal their respective gross fair market values and shall allocate the amount of such adjustment as Net Property Gain or Net Property Loss pursuant to Section 2(c) hereof, provided, however, that if no Series A Preferred Stock (or other Preferred Stock) is outstanding after such redemption or conversion, such Net Property Gain or Net Property Loss shall be allocated in such a manner that after such allocation the Capital Accounts of the Partners are in proportion to their Percentage Interests.
    4. Special Allocations.
    5. Notwithstanding any provision of Sections 1 and 2 of this Exhibit E, the following special allocations shall be made in the following order:

      1. Minimum Gain Chargeback (Nonrecourse Liabilities). If there is a net decrease in Partnership Minimum Gain for any Partnership fiscal year (except as a result of conversion or refinancing of Partnership indebtedness, certain capital contributions or revaluation of the Partnership property as further outlined in Regulation Sections 1.704-2(d)(4), (f)(2) or (f)(3)), each Partner shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to that Partner's share of the net decrease in Partnership Minimum Gain. The items to be so allocated shall be determined in accordance with Regulation Section 1.704-2(f). This paragraph 3(a) is intended to comply with the minimum gain chargeback requirement in said section of the Regulations and shall be interpreted consistently therewith. Allocations pursuant to this paragraph 3(a) shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant hereto.

      2. E-8



      3. Minimum Gain Attributable to Partner Nonrecourse Debt. If there is a net decrease in Minimum Gain Attributable to Partner Nonrecourse Debt during any fiscal year (other than due to the conversion, refinancing or other change in the debt instrument causing it to become partially or wholly nonrecourse, certain capital contributions, or certain revaluations of Partnership property as further outlined in Regulations Sections 1.704-2(i)(4), each Partner shall be specially allocated Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to that Partner's share of the net decrease in the Minimum Gain Attributable to Partner Nonrecourse Debt. The items to be so allocated shall be determined in accordance with Regulation Section 1.704-2(i)(4) and (j)(2). This paragraph 3(b) is intended to comply with the minimum gain chargeback requirement with respect to Partner Nonrecourse Debt contained in said section of the Regulations and shall be interpreted consistently therewith. Allocations pursuant to this paragraph 3(b) shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant hereto.
      4. Qualified Income Offset. In the event a Limited Partner unexpectedly receives any adjustments, allocations or distributions described in Regulation Section 1.704-1(b)(2)(ii)(d)(4), (5), or (6), and such Limited Partner has an Adjusted Capital Account Deficit, items of Partnership income and gain shall be specially allocated to such Partner in an amount and manner sufficient to eliminate the Adjusted Capital Account Deficit as quickly as possible. This paragraph 3(c) is intended to constitute a "qualified income offset" under Regulation Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith.
      5. Nonrecourse Deductions. Nonrecourse Deductions for any fiscal year or other applicable period shall be allocated to the Partners in accordance with their respective Percentage Interests.
      6. Partner Nonrecourse Deductions. Partner Nonrecourse Deductions for any fiscal year or other applicable period shall be specially allocated to the Partner that bears the economic risk of loss for the debt (i.e., the Partner Nonrecourse Debt) in respect of which such Partner Nonrecourse Deductions are attributable (as determined under Regulation Section 1.704-2(b)(4) and (i)(1)).
      7. Curative Allocations. The allocations set forth in paragraphs (a)-(e) and Section 1(b)(2), Section 1(c)(2)(iv), Section 2(b)(2) and Section 2(c)(2)(iv), (the "Regulatory Allocations") are intended to comply with the requirements of Treasury Regulations Sections 1.704-1 (b) and 1.704-2. Notwithstanding any other provisions of Sections 1 and 2, the Regulatory Allocations shall be taken into account in allocating other items of income, gain, deduction and loss among the Partners so that, to the extent possible, the net amount of such allocations of other items and the Regulatory Allocations to each Partner shall be equal to the net amount that would have been allocated to each such Partner if the Regulatory Allocations had not occurred. This paragraph (f) shall be interpreted and applied in such a manner and to such extent as is reasonably necessary to eliminate, as quickly as possible, permanent economic distortions that would otherwise occur as a consequence of the Regulatory Allocations in the absence of this paragraph (f).
    6. Tax Allocations.

      1. E-9



      2. Generally. Subject to paragraphs 4(b) and (c) hereof, items of income, gain, loss, deduction and credit to be allocated for income tax purposes (collectively, "Tax Items") shall be allocated among the Partners on the same basis as their respective book items.
      3. Sections 1245/1250 Recapture. If any portion of gain form the sale of property is treated as gain which is ordinary income by virtue of the application of Code Section 1245 or 1250 ("Affected Gain"), then (A) such Affected Gain shall be allocated among the Partners in the same proportion that the depreciation and amortization deductions giving rise to the Affected Gain were allocated and (B) other Tax Items of gain of the same character that would have been recognized, but for the application of Code Sections 1245 and/or 1250, shall be allocated away from those Partners who are allocated Affected Gain pursuant to Clause (A) so that, to the extent possible, the other Partners are allocated the same amount, and type, of capital gain that would have been allocated to them had Code Sections 1245 and/or 1250 not applied; provided, however, that the net amount of Tax Items allocated to each Partner shall be the same as if this paragraph 4(b) did not exist. For purposes hereof, in order to determine the proportionate allocations of depreciation and amortization deductions for each fiscal year or other applicable period, such deductions shall be deemed allocated on the same basis as Net Property Gain and Net Property Loss for such respective period.
      4. Allocations Respecting Section 704(c) and Revaluations. If any Partnership property is subject to Code Section 704(c) or is reflected in the Capital Accounts of the Partners and on the books of the Partnership at a book value that differs from the adjusted tax basis of such property, then the tax items with respect to such property shall, in accordance with the requirements of Regulations Section 1.704-1(b)(4)(i), be shared among the Partners in a manner that takes account of the variation between the adjusted tax basis of the applicable property and its book value in the same manner as variations between the adjusted tax basis and fair market value of property contributed to the Partnership are taken into account in determining the Partners' share of tax items under Code Section 704(c). The General Partner is authorized to choose any reasonable method permitted by the Regulations pursuant to Code Section 704(c), including the "remedial allocation" method, the "curative allocation" method and the traditional method; provided that the General Partner agrees to use reasonable efforts to minimize the amount of taxable income in excess of book income allocated to the holders of the Series B Preferred Units, the Series C Preferred Units, the Series D Preferred Units and the Series E Preferred Units.
      5. Code Section 752 Specification. Pursuant to Regulations Section 1.752-3, the Partners' interest in Partnership profits for purposes of determining the Partners' shares of excess nonrecourse liabilities shall be their Percentage Interests.

E-10



EXHIBIT M

ADDRESSES OF PARTNERS - PARTNERSHIP UNIT HOLDERS

Partnership Unit Holders

[This is the current Exhibit M maintained by Essex, updated to refer
to the new Series Z-1 Incentive Unit holders]


M-1



EXHIBIT R

[List of Series Z-1 Incentive Units holders maintained by Essex]


R-1



EXHIBIT S

(Series Z-1 Target FFO amounts)


S-1



EX-31.1 6 exh31-1.htm EX-31.1 10-Q Exhibit 31.1

Exhibit 31.1

ESSEX PROPERTY TRUST, INC.
CERTIFICATION PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002

I, Keith R. Guericke, Chief Executive Officer of Essex Property Trust, Inc., certify that:

  1. I have reviewed this quarterly report on Form 10-Q of Essex Property Trust, Inc.;
  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

  1. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
  2. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
    1. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
    2. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
    3. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
  1. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

    1. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data; and
    2. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

August 13, 2003

By: /s/ KEITH R. GUERICKE

Keith R. Guericke
Cheif Executive Officer
Essex Property Trust, Inc.






EX-31.2 7 exh31-2.htm EX-31.2 10-Q Exhibit 31.2

Exhibit 31.2

ESSEX PROPERTY TRUST, INC.
CERTIFICATION PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002

I, Michael J. Schall, Chief Financial Officer of Essex Property Trust, Inc., certify that:

  1. I have reviewed this quarterly report on Form 10-Q of Essex Property Trust, Inc.;
  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

  1. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
  2. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
    1. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
    2. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
    3. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

  1. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

    1. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data; and
    2. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

August 13, 2003

By: /s/ MICHAEL J. SCHALL

Michael J. Schall
Cheif Financial Officer
Essex Property Trust, Inc.






EX-32.1 8 exh32-1.htm EX-32.1 10-Q Exhibit 32.1

Exhibit 32.1

ESSEX PROPERTY TRUST, INC.

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with this quarterly report of Essex Property Trust, Inc. (the "Company") on Form 10-Q for the period ended June 30, 2003 (the "Report"), I, Keith R. Guericke, Chief Executive Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.

August 13, 2003

By: /s/ KEITH R. GUERICKE

Keith R. Guericke
Cheif Executive Officer








EX-32.2 9 exh32-2.htm EX-32.2 10-Q Exhibit 32.2

Exhibit 32.2

ESSEX PROPERTY TRUST, INC.

CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with this quarterly report of Essex Property Trust, Inc. (the "Company") on Form 10-Q for the period ended June 30, 2003 (the "Report"), I, Michael J. Schall, Chief Financial Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.

August 13, 2003

By: /s/ MICHAEL J. SCHALL

Michael J. Schall
Cheif Financial Officer








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